Business Funding Terms Every Owner Should Know

Funding conversations move fast and use shorthand. A specialist mentions a factor rate, a holdback, a UCC filing and reconciliation in the same minute, and it is easy to nod along and hope the written offer clarifies things. It usually does not, because the agreement uses the same terms in denser language.

Rather than a dry alphabetical list, this guide groups the vocabulary by the questions an owner actually asks: how much will this cost, how do I pay it back, what can the funder do, and who is on the hook. Each term is explained in plain English with a hypothetical example where useful. It is educational only and not legal advice, so have an attorney review any agreement you sign.

Terms about cost

Principal is the amount funded, before any costs. A factor rate is a multiplier, commonly quoted around 1.1 to 1.5 for merchant cash advances though it varies, that is applied to the advance to determine the total payback. Say you receive $50,000 at a 1.30 factor rate: total payback is $65,000, so the cost is $15,000.

APR, or annual percentage rate, expresses cost as an annualized rate and is used on loans and lines of credit. It is not directly comparable to a factor rate without converting for the term. An origination fee is an upfront charge, often deducted from the proceeds, so the net funding you receive is smaller than the principal. Always compare total payback and net proceeds.

Terms about repayment

A term is the length of the repayment period. Amortization describes how a loan payment is split between principal and interest over time. A holdback or split is a percentage of daily card sales or deposits applied to repayment in some advance structures. A fixed ACH remittance is a set daily or weekly debit from your bank account.

Reconciliation is a process some agreements describe for adjusting payments if your revenue drops, and whether and how it works depends on the agreement. A prepayment or early payoff provision explains whether paying off early reduces the amount you owe, and in many advance products, it does not unless a discount is stated.

Daily and weekly payment frequency is a term of its own worth noticing. A weekly payment of $2,250 and a daily payment of $450 repay the same amount per week, but the daily version leaves your account sooner and more often, which changes how much buffer you need through the week.

Terms about what the funder can do

A UCC filing, under the Uniform Commercial Code, is a public notice that a funder has a claim on certain business assets, which can affect your ability to get other financing. A lien is a legal claim on property. A default is a failure to meet a contract obligation, and the agreement defines what counts, which can include more than missing a payment.

A confession of judgment is a clause that lets a funder obtain a court judgment against you without a full trial in some situations, and rules about its use vary by state. If you see it, ask an attorney about it before signing.

Terms about who is responsible

A personal guarantee means an individual, usually the owner, agrees to be responsible for obligations under the agreement, to a degree defined in the contract. A guaranty of performance, often used in advance agreements, typically ties the guarantor to specific conduct, such as not diverting receivables, rather than to repayment itself. The language is subtle, so read it closely.

Recourse describes whether the funder can pursue you beyond the specific collateral or receivables. Cross-default clauses link agreements so that default on one may trigger default on another.

Terms about how you qualify

Time in business is how long the company has operated. Average daily balance is the typical amount in your account, which funding partners often review in bank statements. NSF means non-sufficient funds, a returned or overdrawn item. A soft pull is a credit check that does not affect your score; a hard pull is one that can.

Stacking means holding multiple advances or funding obligations at once. Underwriting is the process of evaluating your file to decide whether and on what terms to fund it.

Credit score and business credit score are also commonly mentioned. The first refers to the owner's personal credit file; the second to a profile built around the business itself. Funding partners may look at either or both, and your specialist can tell you which matters for a given option.

Terms about how the market works

A broker, such as Fidelity Funding, connects businesses with funding partners rather than lending directly. An ISO, or independent sales organization, is a related term for firms that bring deals to funders. A funding partner is the company that actually provides the funds and sets the terms.

Working capital refers to the money you use for day-to-day operations, roughly current assets minus current liabilities. Credit line, term loan, equipment financing, invoice factoring and merchant cash advance are product names, each with its own mechanics. If any term in an offer is unfamiliar, ask your specialist to explain it in plain language, and ask for the definition in writing.

This article is for general information only and isn’t financial, legal or tax advice. Funding approval, amounts and terms are set by funding partners and depend on underwriting.