Business & CRE Financing Glossary

An agency loan is a multifamily mortgage made under Fannie Mae or Freddie Mac guidelines. The agencies do not lend directly. Approved lenders in the Fannie Mae DUS and Freddie Mac Optigo networks originate the loan and sell it to the agency, which securitizes it and sells the bonds to investors.

Bad boy carve-outs are exceptions in a non-recourse loan that make the borrower or guarantor personally liable if specific bad acts occur, such as fraud, misapplied rents, unauthorized liens or transfers, or a voluntary bankruptcy filing. They are the reason a non-recourse loan can suddenly become recourse.

Break-even occupancy is the occupancy rate at which a property's income exactly covers its operating expenses and debt service, with nothing left over and nothing short. Add operating expenses to annual debt service, divide by gross potential income, and you learn how much vacancy the property can absorb before it stops paying for itself.

Cap rate is a property's net operating income divided by its price, expressed as a percentage. It answers one question: what unleveraged annual return would this property produce if you bought it in cash? A $2.4M property producing $180,000 of NOI has a 7.5% cap rate.

Cash-on-cash return is your annual pre-tax cash flow after debt service divided by the cash you actually put into a deal. Unlike cap rate, it accounts for your loan. A property returning $46,110 a year on $1,200,000 of invested cash has a 3.84% cash-on-cash return.

A CMBS loan is a commercial mortgage that the lender pools with hundreds of others and sells to bond investors as securities. Because the loan is priced for the bond market rather than a bank's balance sheet, it usually carries a lower fixed rate and non-recourse terms, but almost no flexibility after closing.

A commercial bridge loan is short-term financing, typically 12 to 36 months, used to buy, stabilize, or reposition a commercial property until it qualifies for permanent financing. It costs more than a bank loan and buys speed and flexibility instead. It only works if you have a defined exit.

Debt yield is a property's net operating income divided by the loan amount, expressed as a percentage. It tells a lender what cash return it would earn if it foreclosed and owned the property outright. A $6,000,000 loan on a property producing $480,000 of NOI carries an 8% debt yield.

Defeasance is a way to release a property from a commercial mortgage without paying the loan off. You buy a portfolio of US government securities whose payments match the loan's remaining payments, pledge that portfolio as substitute collateral, and transfer the loan to a successor entity. The loan keeps running; your building goes free.

Equity multiple is total cash returned divided by total cash invested, ignoring time. A $500,000 investment that pays back $1,000,000 has a 2.0x equity multiple. It tells you how much money you made, while IRR tells you how fast, which is why investors read the two together.

Escrow, also called impounds, is money your lender collects each month on top of principal and interest and holds to pay property taxes and insurance when they come due. Commercial loans usually add reserve accounts on top - replacement reserves for the building, and tenant improvement and leasing reserves for commercial space.

Gross rent multiplier is a property's price divided by its gross annual rental income. A building listed at $1,150,000 collecting $138,000 of rent has a GRM of 8.33. It is a fast screening tool that ignores operating expenses entirely, so it compares properties but never prices them.

Internal rate of return is the annualized rate at which a deal's cash flows, including the sale, grow your investment. It weights timing: a dollar returned in year one counts more than a dollar in year five. A $1,000,000 investment returning $1,450,000 over three years earns roughly a 13.9% IRR.

A loan assumption is when a buyer takes over the seller's existing mortgage, keeping the same rate, balance, and remaining term, instead of getting a new loan. The lender must approve the buyer, and an assumption fee typically applies. It is most valuable when the existing rate is below current market.

The loan constant is annual debt service divided by the original loan amount, expressed as a percentage. It folds interest and principal repayment into one number you can compare directly against a property's cap rate. A $5,000,000 loan at 6.5% on a 25-year amortization has a loan constant of about 8.1%.

Loan-to-cost (LTC) is the loan amount divided by the total cost of a project - acquisition, hard costs, soft costs, contingency and interest carry. Construction and value-add lenders apply it alongside loan-to-value, and the lower of the two limits is what actually sizes your loan.

Loan-to-value (LTV) is the loan amount divided by the property's value, expressed as a percentage. Lenders measure value as the lower of the appraised value or the purchase price, so LTV sets your maximum loan and, by subtraction, the cash you have to bring to closing.

Net operating income is a property's annual income after operating expenses but before debt payments, depreciation, and capital improvements. It measures what the building itself earns, independent of how you finance it. A retail center collecting $444,000 in effective gross income with $148,000 of operating expenses produces $296,000 of NOI.

A non-recourse loan is secured only by the property. If you default, the lender's remedy is to take the collateral; it cannot pursue your personal assets or your other properties for the shortfall. That protection holds only as long as you stay inside the loan's carve-out provisions.

A pro forma is a projection of what a property will earn, not a record of what it has earned. It shows rents, occupancy and expenses the owner believes are achievable after improvements, better management or market growth. Lenders size loans on actual trailing results, not on a pro forma.

A rent roll is a dated list of every unit or suite in a property showing who occupies it, what they pay, how much space they hold, and when their lease ends. Lenders use it to verify income, test how much rent rolls over soon, and check how concentrated the tenancy is.

Yield maintenance is a prepayment penalty designed to make the lender whole. If you pay off early, you owe the present value of the interest the lender would have collected through maturity, minus what they can earn reinvesting your payoff in Treasuries. When rates have fallen, this fee can be very large.

An ACH deduction is an automatic withdrawal a funding provider pulls from your business checking account on a fixed schedule, usually every business day or every week. The amount is set at signing and does not move with your sales, so a slow week costs exactly the same as a strong one.

Advance rate is how much capital a funder will give you expressed as a percentage of a revenue measure, usually your average monthly bank deposits or card sales. An 80% advance rate on $90,000 of average monthly deposits means an offer of about $72,000. It sets the size of the deal, not its price.

APR is financing cost expressed as a standardized annual rate, covering interest plus most fees spread across the repayment term. It lets you line up a term loan, a line of credit, and a merchant cash advance on the same scale. MCAs quote factor rates instead, but the cost can still be annualized into an estimated APR.

A blanket lien is a security interest that covers substantially all of a business's assets rather than one named item — inventory, equipment, receivables, cash, and often intangibles. It is normally created by an all-assets UCC filing, and it is the single biggest reason a business struggles to add financing later.

A broker is an intermediary who submits your application to multiple lenders and funders rather than to one. Brokers widen your options and save real time, but nearly all are paid a commission by whichever funder closes the deal, which means their incentives and yours are not automatically aligned.

Business bank statements are the last three to six months of your operating account, and they are the primary document most non-bank lenders underwrite. Reviewers read them for average daily balance, deposit consistency, NSF events, negative-balance days, and payments already going out to other funders.

A chargeback is a card transaction your customer disputes and the issuing bank reverses, pulling money back out of your merchant account weeks after the sale. For an advance repaid from card settlements, chargebacks shrink the pool the provider collects from, so underwriters watch your chargeback ratio closely.

A confession of judgment is a clause in which the borrower agrees in advance that, if the creditor declares a default, a judgment may be entered against them — often before the borrower has had the usual opportunity to contest it in court. Its availability is restricted in some states.

DSCR is the ratio of cash available to pay debt to the debt payments required over the same period. A DSCR of 1.25 means there is $1.25 of cash for every $1.00 of debt service. Lenders set minimums, commonly between 1.15 and 1.30. Below 1.00 is a shortfall.

Default is the moment your agreement says you have broken it — which is not the same as missing a payment. Contracts define a list of events, and several of them have nothing to do with money. Once default is declared, a provider can typically accelerate the balance, add fees, and begin enforcement.

Effective annual rate is the true yearly cost of financing once compounding is taken into account. Where APR simply multiplies the periodic rate out to a year, EAR compounds it. On products that collect payments daily or weekly, EAR can be dramatically higher than the APR quoted on the same deal.

An exit strategy is your written plan for clearing a short-term obligation without renewing it. For a merchant cash advance, that usually means one of four paths: paying it off from operating cash, refinancing into a longer-term product, retiring it during a seasonal revenue peak, or converting to invoice factoring.

A factor rate is a decimal multiplier - usually between 1.10 and 1.50 - that sets the total amount you must repay on a merchant cash advance. Multiply the amount funded by the factor rate and you get your total payback. Unlike interest, it does not change based on how long repayment takes.

A holdback rate is the percentage of your daily card sales an advance provider withholds to collect what it purchased. It controls speed, not cost. A higher holdback clears the balance faster and takes more cash out of each day; a lower one eases daily pressure and extends the schedule.

An MCA is the purchase of future receivables at a discount; a business loan is borrowed principal repaid with interest on a set schedule. Priced on the same $100,000 over the same twelve months, an MCA at a 1.35 factor rate costs about $35,000 while a term loan near 14% APR costs roughly $7,745.

A merchant cash advance is a purchase of your future revenue, not a loan. A provider pays you a lump sum today in exchange for a fixed dollar amount of your future card sales or bank deposits, which you remit as a percentage of sales until that purchased amount has been collected in full.

Minimum monthly volume is the revenue floor a lender requires before it will fund you, usually measured as average monthly bank deposits and sometimes as card sales alone. Thresholds commonly run from about $10,000 to $20,000 a month, calculated across your last three to six months of statements.

A modification agreement is a written amendment that changes the terms of financing you already have, most often the payment amount or the schedule. It is the standard tool for avoiding default when cash flow drops. It rarely reduces what you owe, and it often adds fees while restating the original contract.

An NSF, or non-sufficient funds event, happens when a provider attempts an automatic debit and your account does not hold enough to cover it. The payment is returned unpaid, your bank charges a returned-item fee, the provider usually charges its own, and repeated NSFs are commonly written as an event of default.

An origination fee is a charge for underwriting and processing your financing, usually 1% to 5% of the contract amount. It is often deducted from the money before it hits your account, so you receive less than the contract says while still repaying the full amount — which raises your real cost.

A personal guarantee is a signed promise that makes you, not just your business, responsible for the debt. If the company cannot pay, the lender can pursue your personal income and assets. Most small business financing requires one, and its scope — unlimited, limited, or joint — is set by the contract you sign.

A pre-payment penalty is a charge for repaying financing before the scheduled term ends. On a conventional loan it is a defined fee, often a percentage of the remaining balance. On a merchant cash advance there is usually no penalty clause at all — but also no automatic discount, because the payback total is fixed at signing.

Reconciliation is a contract provision that lets your payment be recalculated when actual sales differ from what the fixed payment assumed. If revenue falls, a working reconciliation clause reduces the debit toward the agreed percentage of real receipts. Whether it functions at all depends entirely on how the clause is written.

A remittal rate is the share of your revenue an advance agreement says you will remit to the provider, usually stated as a percentage of total deposits. In many contracts it is not collected as a live percentage but converted into a fixed daily or weekly ACH amount derived from that percentage.

A renewal is a new advance from your existing provider that pays off whatever remains on the current one and funds the difference. It is fast and needs little new paperwork. It also applies a fresh factor rate to the balance being rolled in, so you end up paying a cost on a cost.

Revenue-based financing gives you capital in exchange for a fixed percentage of your monthly revenue until you have repaid a capped total, usually expressed as a multiple such as 1.2x. Payments rise and fall with sales, so the cost is fixed but the repayment period is not.

Seasoning is how long a specific account, revenue stream, or pool of funds has been established, not how old the business is. An account opened five weeks ago has five weeks of seasoning even if the company is six years old, and thin seasoning limits what underwriters can verify.

A soft credit check is a review of your credit file that creates no hard inquiry and does not affect your score. Lenders use it to pre-qualify you, and only you see it on your report. A hard inquiry, visible to other lenders, typically comes later when you accept an offer.

The specified purchased amount is the fixed dollar total a merchant cash advance provider is entitled to collect from your future revenue. It equals the amount funded multiplied by the factor rate, it is set the day you sign, and it does not shrink when you repay faster than expected.

Split withholding is a merchant cash advance collection method where your card processor divides each batch of card sales, sending an agreed percentage to the advance provider and depositing the rest to your bank. The payment is taken before the money ever reaches your operating account.

Stacking is taking a second or third cash advance while an existing one is still being repaid, so two or more providers draw from the same deposits at the same time. It raises daily outflow immediately, and many agreements treat taking additional funding as an event of default.

Stack position is the order in which multiple funding providers get repaid out of the same deposits. First position funds first and collects first; second and third positions sit behind it. Each step down the stack means less reliable cash to collect from, and providers price that risk into a materially higher factor rate.

Time in business is how long your company has been operating, measured from the date it was formed or first earned revenue. Lenders treat it as a proxy for survival risk. Common minimums are three to six months for advances, twelve months for online lenders, and two years for banks.

Trailing 12 months (TTM) is the most recent twelve consecutive months of performance, rolling forward each month instead of resetting in January. Business lenders use TTM deposits to judge revenue trend and seasonality; commercial real estate lenders use a T-12 operating statement to verify a property's actual income and expenses.

A UCC filing is a public notice — a UCC-1 financing statement filed with your state — that records a lender's security interest in specific business assets. It does not transfer anything or create a debt. It tells every other lender that someone already has a claim, and in what order.

Weekly remittance is a repayment schedule that collects one payment per week instead of one every business day. The total repaid is identical; it simply arrives in five-day blocks. That eases daily pressure but requires a much larger balance sitting in the account on the pull day.