Business Loan Terms Explained in Plain English

Amount and cost terms

Principal is the amount funded. Interest, APR and factor rate describe cost. Total repayment is the number that matters most when comparing offers.

• Principal: the amount you borrow or receive, before cost.
• Interest rate: the yearly percentage charged on the unpaid balance.
• APR: yearly cost including certain fees, shown on a standard basis. See how APR is calculated.
• Factor rate: a multiplier, such as 1.30, applied to the amount funded to set total repayment. Details in factor rates explained.
• Total repayment (payback amount): everything you owe, including cost.
• Origination fee: a fee for processing the financing, sometimes deducted from the proceeds.

When two offers use different cost terms, convert both to total dollars paid and divide by the number of months for a rough monthly cost.

Time and payment terms

Term is how long you have to repay. Payment frequency, amortization and balloon payments define how and when the money comes back.

• Term: the repayment period, from a few months to many years.
• Payment frequency: daily, weekly, monthly or tied to a share of sales.
• Amortization: spreading payments so each one covers interest and some principal until the balance reaches zero.
• Balloon payment: a large final payment due after smaller regular ones.
• Draw period and repayment period: on a line of credit, the time you can borrow and the time you must pay down. See draw period vs. repayment period.
• Grace period: a short window after a due date before penalties apply.

Convert frequent payments to a monthly equivalent so they line up with your monthly cash flow. A $400 daily payment on 22 business days is roughly $8,800 a month.

Security terms: collateral, lien, guarantee

Collateral is an asset pledged to the funder. A lien is the funder's recorded claim. A guarantee makes someone personally responsible.

• Secured vs. unsecured: secured financing is backed by assets; unsecured is not. See secured vs. unsecured lines.
• Collateral: equipment, inventory, receivables, property or other assets pledged.
• Lien: a legal claim on property until the debt is paid. Read what a lien is.
• UCC filing: a public record of a funder's claim on business assets.
• Blanket lien: a claim covering all or most business assets.
• Personal guarantee: a promise by an owner to repay if the business cannot. See personal guarantee.

Ask what is pledged, whether a lien limits other borrowing and how it is released after payoff.

Contract terms: covenants, default and acceleration

Covenants are promises you make while the debt is outstanding. Default and acceleration describe what happens if you break them or miss payments.

• Covenant: a rule you agree to follow, such as keeping insurance, providing financial statements or not taking more debt without notice.
• Event of default: a breach that allows the funder to take action, such as missed payments or false statements.
• Cure period: time you have to fix a breach.
• Acceleration: the funder demands the full remaining balance.
• Cross-default: default on one debt triggers default on another.
• Confession of judgment, arbitration, venue: terms that affect how disputes are handled. Ask an attorney to review these.

See business loan agreement for what to check in the contract itself.

Product terms you will see in offers

Term loan, line of credit, revenue-based financing, working capital and equipment financing each use these terms differently.

Our business financing terms article adds more definitions.

Terms that hide cost: prepayment, renewal and stacking

Check whether early payoff saves money, how renewals are priced and whether the contract restricts additional financing.

• Prepayment penalty: a fee for paying off early.
• Early payoff discount: a reduction of the remaining cost if you pay early. Not all products offer one.
• Renewal: new financing that pays off the old balance. Check how unpaid cost is treated.
• Stacking: taking several advances at once, which can strain cash flow. See loan stacking.
• Negative pledge: a promise not to pledge assets to others.

These details can make a lower-looking offer cost more in practice.

Using the terms to compare offers with your numbers

Write down amount, total repayment, term, payment size and fees for each offer, then ask what the money produces and how fast it pays back.

Illustrative example. A $25,000 equipment purchase financed for $29,000 total over 24 months costs $4,000 and about $1,208 a month. If the equipment adds $2,000 of monthly gross profit, it covers the payment with room to spare. If it adds $900, it does not.

ROI Funder begins with that arithmetic and shows true cost, payback period and monthly-equivalent payments before anyone signs. Use our comparison worksheet with your offers. If you are ready, apply online in a few minutes with a soft credit pull. We consider 500+ FICO, 6+ months in business and $20,000+ monthly revenue, in all 50 states.