The words in a business financing offer, defined plainly.

Before you read an offer

If you are weighing a loan repaid on a fixed schedule, start with our term loans page. This page defines the words you will see in that offer and in most others.

Most of these words answer one of three questions: how much you get, how you pay it back, and what the lender can do if you don't. Read every offer with those three questions in mind, and ask for anything unclear in writing.

Money and repayment

• Principal. The amount you borrow and owe back, apart from interest and fees. Most 7(a) term loans, for example, are repaid with monthly payments of principal and interest from the cash flow of the business^[1].
• Term. The length of time you have to repay. Every offer states it. Read it next to the payment schedule, because the same principal over a different term changes both the payment and the total cost.
• Amortization. How each payment is split between interest and principal over the life of the loan. Ask for the schedule, so you can see how much principal each payment actually repays.
• Draw. Taking money from a line of credit. A line of credit lets you draw what you need, repay it, and draw again^[2]. See how a business line of credit works.
• Prepayment. Paying off early. Some offers lower what you owe when you prepay. Others charge for it, or keep the full cost due either way. SBA suggests asking lenders about prepayment penalties^[3].
• Total cost of capital. Everything you will pay beyond the principal, in dollars: interest, fees and any other charges. It is the one number that lets you compare offers built in different ways.

Security and promises

• Collateral. Property you pledge to secure the financing, such as equipment, receivables or real estate. If you don't repay, the lender can look to it.
• UCC lien. When a lender takes a security interest in business property, it usually files a UCC financing statement with the state. That filing names the debtor, names the secured party, and indicates the collateral^[4]. Once nothing is owed, ask the secured party in writing to terminate it^[5].
• Personal guarantee. A promise by an owner to repay if the business does not. Under SBA's rules, owners of a large share of the business generally must sign one for an SBA loan^[6]. Ask whether yours is limited or unlimited, and read it before you sign.
• Covenant. A promise in the loan agreement about how you will run the business while you owe money. Some lenders include a covenant that prevents borrowing at other institutions without their knowledge and consent^[7].
• Default. Breaking the agreement, by missing payments or breaking a covenant. SBA suggests asking when a lender can demand full repayment^[3].

Our funding readiness guide shows how to search for UCC filings already on your business before you apply.

Words that describe the structure

• Secured and unsecured. Secured financing is backed by collateral. Unsecured financing is not, which usually puts more weight on cash flow and credit.
• Revolving and non-revolving. A revolving line can be drawn, repaid and drawn again. A non-revolving loan is paid out once and repaid. SBA's Seasonal and Contract CAPLines may be either^[8].
• Borrowing base. For lines secured by receivables and inventory, the borrowing base limits how much can be advanced at any particular time^[7].
• Recourse. In factoring, whether an invoice your customer doesn't pay comes back to you. A factor buys receivables with or without recourse^[7].

Some states have their own disclosure rules for commercial financing. New York, for example, requires providers of sales-based financing to disclose items that include the total repayment, the payment amounts and the prepayment terms^[9]. Our commercial financing disclosure laws guide covers each state that has one.

Questions to ask any lender

• What is the total cost in dollars, including every fee?
• What is the payment schedule, and how are payments collected?
• Can I prepay, and does that change what I owe?
• What collateral secures this, and will you file a UCC financing statement?
• Do you require a personal guarantee, and is it limited?
• Which covenants come with it, and what counts as default?
• When can you demand full repayment^[3]?

Where ROK fits

The Club refers businesses to ROK Financial. ROK's partner application lists at least 4 months in business and at least $10,000 in monthly gross sales^[10]. Lenders commonly look at credit history, cash flow, equity and collateral^[8]. Credit is one input among several.

ROK Financial and the lenders it matches you with make every funding decision. Every offer you receive comes from them, so put these questions to the lender whose offer it is.