SBA Loan Glossary

The true yearly cost of a loan, including the interest rate AND all fees (origination fees, guarantee fees, etc.) expressed as a single percentage. APR is always higher than the stated interest rate and gives you the most accurate way to compare loan offers.

The process of paying off a loan through regular scheduled payments that cover both principal (the original loan balance) and interest. Early payments are mostly interest; later payments shift toward principal. SBA 7(a) loans are typically fully amortizing — the final payment pays off the balance completely.

Everything of value owned by your business: cash, accounts receivable, inventory, equipment, real estate, and intangibles like goodwill. Lenders review total assets to assess net worth and collateral availability.

A large lump-sum payment due at the end of a loan term after a series of smaller regular payments. SBA loans generally do NOT have balloon payments — full amortization is preferred — but some conventional companion loans in a 504 structure may include one.

The business entity (LLC, corporation, sole proprietor, partnership) that receives the loan proceeds and is legally obligated to repay. All 20%+ owners typically must also sign a personal guarantee.

A written document outlining your business model, target market, competitive advantage, management team, and financial projections. Lenders use it to evaluate feasibility. Startups and expansion loans almost always require one.

A formal appraisal of a company's fair market value, required when using an SBA loan to acquire an existing business. Must be conducted by a qualified, independent business appraiser for loans over $250,000.

Financial resources available to operate and grow a business. Debt capital comes from loans; equity capital comes from owner investment or retained earnings. Lenders evaluate whether you have sufficient capital to weather downturns.

A nonprofit organization certified by the SBA to administer the 504 loan program. CDCs partner with banks to provide long-term fixed-rate financing for major fixed assets. There are approximately 260 CDCs nationwide.

Mission-driven lenders focused on underserved communities. Many CDFIs serve as SBA Microloan intermediaries and can lend to borrowers who don't yet qualify for traditional SBA loans.

Business or personal assets pledged as security for a loan. If you default, the lender can seize and sell collateral to recover losses. Common collateral includes real estate, equipment, inventory, and accounts receivable. SBA rules require lenders to take all available collateral.

A loan made entirely by a bank without an SBA government guarantee. Typically requires stronger credit, more collateral, and a shorter repayment term than SBA-guaranteed loans.

A numerical rating (300–850 scale) representing your creditworthiness. Most SBA lenders want a personal score of 650+. Business credit scores (Dun & Bradstreet PAYDEX, Experian Business) are also reviewed.

Annual net operating income ÷ annual debt payments. A DSCR of 1.25x means the business earns $1.25 for every $1.00 of debt obligations — the minimum most SBA lenders require. A DSCR below 1.0x means the business cannot cover its debt from operations.

Failure to meet the terms of a loan agreement — typically missing payments. A default triggers the lender's right to demand full repayment, seize collateral, and call on the SBA guarantee.

The cash a borrower contributes at loan closing, reducing the amount financed. SBA loans typically require 10% down. Startups, franchise purchases, or single-purpose properties may require 20–30%.

A unique 9-digit identifier for businesses issued by Dun & Bradstreet. Sometimes required by SBA lenders and federal programs. Free to obtain at dnb.com.

A federal tax ID number assigned by the IRS to identify your business entity — like a Social Security number for your company. Required on all SBA loan applications. Apply free at irs.gov.

The ownership value in a business or property: total assets minus total liabilities. Lenders like to see positive equity (your stake in the business). "Equity injection" refers to the owner's cash contribution to a project.

Cash contributed by the business owner toward a project, reducing the loan amount needed. SBA loans typically require 10% equity injection. Funds must come from the owner (not borrowed) and be verifiable.

An interest rate that stays constant for the entire loan term. Your payment never changes. SBA 504 debenture rates are fixed; SBA 7(a) loans are usually variable but can sometimes be fixed for shorter terms.

The legal contract between a franchisor and franchisee outlining rights, fees, and obligations. The SBA Franchise Directory lists approved franchise brands. Unapproved franchises may require additional review.

The SBA's promise to reimburse an approved lender for a portion of a loss if the borrower defaults. For 7(a) loans up to $150,000, the guarantee is 85%; for larger loans, it's 75%. This guarantee is why lenders offer better terms than conventional loans.

A one-time fee charged by the SBA for providing its guarantee. Based on the guaranteed portion of the loan: 0% for loans ≤$150,000; 2% for $150,001–$700,000; 3% for $700,001–$5M. Loans under $1M to veterans are fee-free. Usually rolled into the loan.

A person who signs a personal guarantee, promising to repay the loan if the business cannot. All owners with ≥20% ownership must personally guarantee SBA loans. Spouses may also be required to sign.

The cost of borrowing money, expressed as an annual percentage of the principal balance. SBA 7(a) variable rates are tied to the Prime Rate plus a spread of 2.25%–4.75% depending on loan size and term. Fixed rates are allowed but must be within SBA maximums.

A free SBA tool at lendermatch.sba.gov that connects borrowers with participating SBA lenders based on their loan needs. Borrowers describe their business and receive contact from interested lenders within 2 days.

How quickly assets can be converted to cash. Lenders check liquidity to ensure you can meet short-term obligations. Cash and accounts receivable are highly liquid; equipment and real estate are not.

The loan amount divided by the appraised value of the collateral. A $400,000 loan on a $500,000 property = 80% LTV. Lower LTV = less risk for the lender.

The length of time to repay the loan. SBA 7(a) maximum terms: 10 years for equipment and working capital; 25 years for real estate. Longer terms mean lower monthly payments but more total interest paid.

SBA loans up to $50,000 (average ~$13,000) for startups and small businesses through nonprofit intermediary lenders. Terms up to 6 years. Great for early-stage businesses that don't yet qualify for larger programs.

Business revenue minus operating expenses, before debt service and taxes. The starting point for calculating DSCR. Lenders often use a trailing 12-month average.

Total assets minus total liabilities. Your business's "book value." Lenders want to see positive net worth and may require it to meet SBA program requirements.

A fee charged by the lender (not the SBA) for processing and funding the loan, typically 0.5%–2% of the loan amount. Negotiate this — some lenders waive it.

A required SBA form listing all personal assets, liabilities, income, and contingent liabilities for every owner with ≥20% ownership. Must be signed and dated within 90 days of submission.

A legal commitment by a business owner to personally repay the loan if the business defaults. SBA requires personal guarantees from all 20%+ owners. This means personal assets (home, savings) are at risk.

A benchmark interest rate set by major U.S. banks, based on the Federal Reserve's federal funds rate. SBA 7(a) variable interest rates are calculated as Prime Rate + a lender spread. As of 2024, Prime Rate is 8.5%.

The original amount of money borrowed, not including any interest or fees. Each monthly payment reduces the outstanding principal balance.

Forward-looking financial projections — typically 2–3 years — showing anticipated revenue, expenses, and profit. Required by lenders for startups and expansion financing.

The binding legal document signed by the borrower promising to repay the loan according to specific terms (amount, rate, schedule). This is the actual loan contract.

Replacing an existing loan with a new loan, usually to get a lower rate, extend the term, or reduce monthly payments. SBA loans can refinance eligible conventional business debt under specific conditions.

The SBA's flagship loan program. Loans up to $5 million for almost any legitimate business purpose — working capital, equipment, real estate, acquisitions, debt refinancing. SBA guarantees up to 85% of the loan.

Long-term, fixed-rate financing for major fixed assets: owner-occupied real estate and heavy equipment. Structured as ~50% bank loan + ~40% CDC debenture + ~10% borrower equity. Loan amounts up to $5.5 million ($5M for most purposes).

A streamlined 7(a) loan up to $500,000 with a 36-hour SBA response time. Trade-off: SBA guarantee is only 50%. Good for experienced business owners who need speed.

The Borrower Information Form required for all SBA 7(a) applications. Collects business and personal background information for all owners and key employees.

SBA-funded centers at universities and colleges offering free one-on-one business consulting, loan prep assistance, and training. Over 900 SBDC offices nationwide. Find yours at americasbdc.org.

A nonprofit network of 10,000+ volunteer business mentors providing free advice to small businesses. Mentors are experienced executives and entrepreneurs. Find a mentor at score.org.

When a business seller agrees to accept deferred payments from the buyer as part of the purchase price. SBA allows seller notes as part of the equity injection if placed on full standby during the SBA loan repayment period.

A formal agreement where a creditor (often the seller in an acquisition) agrees to defer collection until the SBA loan is fully repaid. Required when a seller note is used as equity injection.

Debt that ranks below other debts in priority if the borrower defaults. SBA lenders are typically in the senior (first) position; any seller notes are subordinated.

A loan with a fixed amount disbursed upfront, repaid over a set schedule of principal + interest payments. Most SBA 7(a) loans are term loans. Contrasted with lines of credit, which allow repeated borrowing.

Insurance protecting against losses from defects in property title (liens, ownership disputes, errors). Required for all real-estate-secured SBA loans.

A legal notice filed with the state secretary of state declaring that a lender has a security interest in specific collateral (equipment, inventory, receivables). This "perfects" the lender's lien and protects them if the borrower files bankruptcy.

The lender's process of evaluating a loan application — analyzing creditworthiness, cash flow, collateral, and character (the "5 Cs of Credit") to decide whether to approve the loan and at what terms.

An interest rate that changes periodically based on a benchmark index, typically the Prime Rate. Most SBA 7(a) loans use variable rates. Rates are typically adjusted quarterly. Caps apply — SBA sets maximum spreads above Prime.

Current assets minus current liabilities — the funds available for day-to-day operations. SBA working capital loans can fund payroll, inventory, and operating expenses. Working capital loans typically have shorter terms (7–10 years).

A loan specifically for operating expenses rather than long-term investments. Used to cover payroll, inventory purchases, utilities, and seasonal cash flow gaps.