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Last updated: May 2026

Business Finance Reference

Commercial Finance Glossary: 45+ Terms Defined for Business Owners, Brokers, and Finance Professionals

Commercial finance has its own vocabulary — terms like factor rate, blanket lien, clawback, DSCR, stacking, and subordination that mean specific things in context but are often used loosely or misunderstood by business owners encountering them for the first time. This glossary defines the most important terms you will encounter in commercial lending discussions, loan documents, ISO agreements, and financing proposals. Each definition is written for practical understanding, not just technical accuracy.

Get Matched to a Lender ISO Lending Guide
  • 45+ terms defined in plain language with real-world context
  • Covers MCA, ABL, SBA, ISO, factoring, and working capital terminology
  • Links to deeper guides for key topics throughout the glossary
  • Useful for business owners, referral partners, and finance professionals

Alphabetical Index

A

ABL — Asset-Based Lending

ABL is a form of commercial lending where credit availability is determined by the value of specific assets — most commonly accounts receivable, inventory, or both — rather than by a fixed loan amount based on overall business creditworthiness. The borrower's available credit fluctuates with the value of eligible collateral: as receivables or inventory increase, the borrowing base increases; as assets are collected or sold, availability decreases. ABL facilities are typically structured as revolving lines of credit with periodic borrowing base certificates and field examinations. ABL lenders range from the commercial lending divisions of major banks (for facilities over $5 million) to specialty non-bank ABL lenders serving smaller businesses. See also: accounts receivable financing, inventory financing.

Advance Rate

The percentage of an eligible asset's value that a lender will advance as credit. If a lender will advance 80% against eligible accounts receivable, the advance rate on receivables is 80%. Advance rates vary by asset type, quality, and market conditions: receivables from creditworthy commercial customers might receive an 85% advance rate; finished goods inventory might receive 60%; raw materials might receive 45%. The advance rate reflects the lender's estimate of how much they could recover in a forced liquidation scenario — not the full asset value, but what they could actually get selling it quickly if needed. See also: inventory advance rates by type.

Amortization

The process of gradually paying off a loan through scheduled periodic payments of principal and interest over a defined period. In a fully amortizing loan, each payment includes both principal reduction and interest, and the loan balance reaches zero at the end of the term. In a partially amortizing loan (common in commercial real estate), payments are calculated on a long amortization schedule but the loan matures at an earlier date — resulting in a balloon payment of the remaining principal balance. "Amortization schedule" refers to the specific table showing each payment's principal and interest components over the life of the loan. SBA 7(a) and SBA 504 real estate loans are fully amortizing; most conventional commercial mortgages are not.

B

Balloon Payment

A lump-sum payment of the remaining principal balance due at the end of a loan term. Balloon payments occur when a loan's term is shorter than its amortization period — for example, a 25-year amortization with a 10-year balloon means monthly payments are calculated as if you have 25 years to pay, but at year 10, the entire remaining balance (the amount that would still be outstanding on a 25-year schedule) is due all at once. Balloon payments require the borrower to either refinance the remaining balance, sell the asset, or pay off the balance in cash at maturity. Balloon risk is a key consideration in commercial mortgage underwriting — if rates rise dramatically before the balloon maturity, refinancing may be significantly more expensive than the original loan.

Basis Points

A basis point is 1/100th of one percentage point — 0.01%. Used in finance to precisely describe small differences in interest rates, fees, and yields where percentage point language is too coarse. 100 basis points equals 1 percentage point. If a lender's rate is "Prime plus 250 basis points" and Prime is 7.50%, the rate is 7.50% + 2.50% = 10.00%. Lenders and brokers use basis points routinely in commercial discussions: "the origination fee is 150 basis points" means the fee is 1.5% of the loan amount. Commission points in ISO agreements are often discussed as basis points in more precise contexts: a "25 basis point residual" means a 0.25% monthly residual on the outstanding balance.

Blanket Lien

A security interest in all current and future assets of a business — as opposed to a specific lien on a particular identified asset. Blanket liens are created by filing a UCC-1 financing statement with the collateral described as "all assets" or "all personal property." When a lender has a blanket lien on your business, they have a legal claim against everything your business owns: accounts receivable, inventory, equipment, intellectual property, bank deposits, and any assets acquired in the future. Virtually all alternative lenders (MCA providers, fintech working capital lenders) file blanket liens even on products marketed as "unsecured." Existing blanket liens can block or complicate future secured financing. See dedicated guide: blanket liens in business financing.

Business Credit Score

A score that measures the creditworthiness of a business entity, separate from the owner's personal credit score. The three primary business credit scoring systems are: FICO SBSS (0–300, used by SBA lenders), Dun & Bradstreet Paydex (1–100, based on payment timing), and Experian Business Intelliscore Plus (1–100, predictive default model). Business credit is tied to the business's EIN, not the owner's Social Security Number. Most small business lending still weighs personal credit more heavily than business credit, but business credit scores become increasingly important as businesses grow and access institutional financing. See dedicated guide: business credit scores explained.

Buyout (MCA context)

In the MCA and short-term lending market, a "buyout" refers to paying off an existing merchant cash advance or loan — either through cash payment or through a new advance from a different funder. A buyout advance is specifically structured to pay off an existing position (freeing up the business from that payment obligation) and provide additional new capital on top of the payoff amount. Buyouts can be legitimate refinancing tools when they reduce the business's total payment burden; they can also be used by funders to capture a merchant from a competitor, sometimes resulting in a worse overall financial position for the business if the new terms are unfavorable. Evaluate the total cost of the new combined position, not just the amount of new cash received.

C

Clawback

A clawback is a provision in an ISO or referral agreement that allows a funder to recover all or part of the commission or referral fee paid to the originating party if the funded deal defaults within a specified period after funding. Clawback windows typically run 30 to 90 days for MCA and short-term working capital products — if the merchant defaults in the first 30 days, the full commission is often clawed back; in the first 60 days, a partial clawback may apply on a sliding scale. Clawback provisions are the primary tool funders use to align ISO incentives with deal quality — ISOs who submit deals they know are unlikely to perform absorb a financial consequence. Managing clawback risk requires submitting quality deals with accurate documentation and avoiding pressure to close deals on borrowers with clearly insufficient cash flow.

Collateral

An asset pledged to secure a loan — something the lender can seize and sell to recover their money if the borrower defaults. Common collateral in commercial lending includes real estate (for commercial mortgages), equipment (for equipment loans and leases), accounts receivable (for invoice factoring and ABL revolvers), inventory (for inventory lines of credit), and personal assets (when a personal guarantee is exercised against real estate or personal bank accounts). Collateral requirements vary enormously by product: SBA and bank loans typically require all available collateral; MCA and short-term unsecured products require no specific collateral (but still file blanket UCC liens). The value of collateral to a lender is its expected liquidation value in a default scenario, not its purchase price or accounting book value.

Cost of Capital

The true economic cost of borrowing money, expressed in a way that allows comparison across different products and structures. For traditional loans, cost of capital is expressed as APR (annual percentage rate) — the annualized interest cost including fees. For MCAs, the cost is expressed as a factor rate (total repayment divided by advance amount) or can be converted to an approximate APR based on the expected repayment period. Comparing cost of capital across products requires converting to a common metric — a factor rate of 1.35 with expected repayment in 6 months is roughly equivalent to a 70% APR. Understanding the true cost of capital — not just the monthly payment or the factor rate in isolation — is essential for making informed financing decisions. A lower monthly payment is not the same as a lower cost of capital if the term is longer.

Covenant

A contractual requirement in a loan agreement that the borrower must meet on an ongoing basis during the life of the loan. Covenants are either affirmative (things you must do, like provide financial statements, maintain insurance, or keep minimum cash balances) or negative/restrictive (things you must not do, like take additional debt above a certain amount, pay dividends, or make major asset sales without lender consent). Financial covenants often require maintaining minimum DSCR, maximum leverage ratios, or minimum working capital levels — measured periodically. Violating a covenant is technically a default, which can allow the lender to accelerate the loan (demand immediate full repayment) even if you are current on payments. Covenants are most common in bank term loans, SBA loans, and ABL facilities. Alternative lending products typically have fewer financial covenants.

D

DCR / DSCR — Debt Service Coverage Ratio

DSCR measures a business's ability to service its debt obligations from operating income. Calculated as: Net Operating Income (or adjusted EBITDA) ÷ Total Annual Debt Service (all principal and interest payments). A DSCR of 1.25x means the business generates $1.25 in operating income for every $1.00 of annual debt service — a 25% coverage cushion. Lenders typically require a minimum DSCR of 1.20x to 1.35x. A DSCR below 1.0x indicates the business cannot cover its debt from operations. DSCR is one of the most important metrics in commercial real estate lending (based on property NOI), SBA lending (based on global cash flow of all businesses and personal obligations of the guarantor), and bank term lending. Alternative lenders typically use revenue multiples or payment-to-revenue ratios rather than DSCR.

Default

A default occurs when a borrower fails to meet the terms and conditions of a loan agreement. Payment default (missing a scheduled payment) is the most obvious form, but defaults can also be triggered by covenant violations, providing false information in the loan application, filing for bankruptcy, failing to maintain required insurance, or any other material breach of the loan agreement. Upon default, lenders typically have the right to: stop making further advances on lines of credit, accelerate the loan (demand the full remaining balance immediately), exercise their security interests (seize and liquidate collateral), and pursue the personal guarantor. Not every default results in immediate aggressive action — lenders often prefer workout arrangements — but the legal rights exist from the moment of default regardless of what action the lender chooses to take initially.

Discount Rate (Factoring)

In invoice factoring, the discount rate (or factoring fee) is the percentage of the invoice face value that the factoring company charges as their fee for purchasing the invoice. If a factoring company buys your $100,000 invoice and charges a 3% discount rate, you receive $97,000 (minus any reserve holdback that is released when the invoice pays). Discount rates in factoring are typically quoted per 30-day period: a 1.5% per 30-day rate on a $100,000 invoice that takes 45 days to collect would cost approximately $2,250. Rates vary based on invoice size, customer creditworthiness, industry, and volume. Invoice factoring discount rates should not be confused with the Federal Reserve's discount rate — they are unrelated concepts sharing a term.

Draw

A draw (also called a drawdown) is the act of borrowing money from a revolving line of credit or other facility that has available but undrawn capacity. On a $250,000 revolving line of credit with $150,000 currently outstanding, the business has $100,000 of available credit that can be drawn at any time. Drawing $50,000 reduces available capacity to $50,000 and increases the outstanding balance to $200,000. In ABL facilities, the maximum draw is limited by the current borrowing base — the borrower cannot draw more than the eligible collateral supports, even if the approved credit limit is higher. The flexibility to draw, repay, and draw again is the defining feature of revolving credit vs. term loans, which distribute the full principal once and amortize it over time.

F

Factor Rate

A pricing mechanism used in merchant cash advances instead of an interest rate. Expressed as a decimal multiplier (e.g., 1.25, 1.35, 1.45). The total repayment amount equals the advance amount multiplied by the factor rate. Example: $100,000 advance at a factor rate of 1.35 = total repayment of $135,000. The $35,000 difference is the MCA's cost. Important: factor rates are not APR. To compare to APR, you need to estimate repayment duration — a 1.35 factor rate repaid in 6 months is roughly equivalent to 70% APR; repaid in 12 months, roughly 35% APR. Unlike interest on a loan, factor rate cost is fixed regardless of repayment speed — paying off the MCA early does not reduce the total dollar cost. This is a meaningful difference from interest-bearing debt, where prepayment saves money. See also: working capital financing.

Factoring / Invoice Factoring

Factoring is the sale of outstanding invoices (accounts receivable) to a third party — the factoring company — at a discount. The business sells its receivables and receives immediate cash; the factoring company collects payment from the customers when the invoices are due. Factoring is not a loan — it is a sale of an asset. Factoring provides immediate liquidity without adding debt to the balance sheet. There are two main types: recourse factoring (the business is liable if customers don't pay) and non-recourse factoring (the factor absorbs customer non-payment losses). Factoring is primarily used by B2B businesses with creditworthy commercial customers and 30- to 90-day payment terms. It does not work for B2C businesses or for invoices to non-creditworthy buyers. See dedicated guide: how accounts receivable financing works.

G

Guarantee / Personal Guarantee

A guarantee is a legally binding commitment by a third party (the guarantor) to repay a debt if the primary obligor (the business) fails to do so. A personal guarantee — required on virtually all small business commercial loans — means the business owner commits their personal assets to back the business debt. If the business defaults and cannot repay, the lender can pursue the guarantor's personal bank accounts, real estate equity, personal investment accounts, and other personal property. An unlimited personal guarantee has no cap on liability; a limited guarantee caps the guarantor's exposure at a specified amount. Business owners should understand that signing a personal guarantee on a business loan effectively eliminates the liability shield that an LLC or corporation otherwise provides for that specific debt.

I

ISO — Independent Sales Organization

An ISO in commercial finance is an entity that originates business financing deals — working capital loans, MCA, equipment financing, and other products — and places them with funders or lenders, earning a commission when a deal closes and funds. ISOs do not lend from their own capital; they are origination and placement intermediaries. ISOs maintain agreements with multiple funders across different product categories, giving them the ability to match deals to the appropriate financing source. The term originated in payment processing and was adopted by the commercial finance industry because the structure is similar: a third party originates relationships and transactions on behalf of the capital provider. See dedicated guide: ISO lending explained.

L

Lien

A lien is a legal right or claim against an asset or property as security for a debt. The lienholder has the right to have the debt satisfied from the proceeds of the asset if the debtor defaults. Liens can be voluntary (the borrower grants a security interest in exchange for credit — a mortgage, equipment loan, UCC filing) or involuntary (imposed by law — tax liens, mechanic's liens, judgment liens). Lien priority determines which creditor gets paid first from asset sale proceeds in a default or insolvency scenario. For commercial business financing, the relevant lien types are UCC Article 9 security interests in personal property (all non-real-estate assets) and mortgage/deed of trust liens in real property. See also: blanket lien, UCC.

LTV — Loan-to-Value Ratio

LTV is the loan amount divided by the appraised value of the collateral, expressed as a percentage. An $800,000 loan on a $1,000,000 property is an 80% LTV. LTV is the primary measure of collateral risk in secured lending — the higher the LTV, the smaller the equity cushion protecting the lender. If an 80% LTV loan goes into default and the collateral is worth only 75% of the original appraised value at the time of liquidation, the lender may not fully recover. Commercial real estate lenders typically limit LTV to 65–80% depending on property type; SBA programs allow up to 90% for owner-occupied properties with personal guarantee. Equipment lenders typically lend at 80–100% LTV of equipment fair market value depending on the asset type and borrower credit profile.

M

MCA — Merchant Cash Advance

A merchant cash advance is a form of business financing where a funder purchases a portion of a business's future revenue (typically future credit card or debit card receipts) at a discount, in exchange for an upfront cash payment. MCA is technically not a loan — it is a purchase of future receivables. The total repayment amount is determined by the factor rate; repayment is made through a daily percentage holdback of credit card processing batches (split-processing) or daily ACH debit from the business bank account. MCA requires no collateral in the traditional sense, no fixed repayment schedule, and approvals can happen within 24–48 hours. The cost is high relative to traditional lending — factor rates of 1.20 to 1.50 are common. MCA is most suitable for businesses with high credit card volume, short-term specific capital needs, and revenue profiles that make traditional qualification difficult. See also: working capital financing.

O

Origination Fee

A fee charged by a lender at loan origination — when the loan is made — as compensation for the cost of underwriting, processing, and closing the loan. Origination fees are typically expressed as a percentage of the loan amount (e.g., "2 points" means a 2% origination fee on a $200,000 loan = $4,000 fee) or as a flat dollar amount. Origination fees are part of the total cost of borrowing and should be included in APR calculations. Alternative lenders often build their origination fee into the factor rate (so the fee is not separately disclosed). SBA loans have specific origination fee limits and SBA guarantee fees that are separate from the lender's origination fee. Origination fees for SBA loans are often called "SBA packaging fees" and are subject to specific regulatory caps. Ask for full fee disclosure before signing any loan agreement.

P

PO Financing — Purchase Order Financing

Purchase order financing is a short-term facility where a funder pays the business's supplier directly for goods needed to fulfill a confirmed customer purchase order. The funder is repaid when the end-customer pays the invoice. PO financing enables businesses to take on orders larger than their cash position can support without turning down revenue. Key characteristics: the funder pays the supplier (not the business); qualification is driven by end-customer creditworthiness rather than business credit; costs run 2–6% per 30 days; minimum transaction sizes are typically $50,000–$100,000; physical goods are required (services are not eligible). PO financing is commonly used by distributors, importers, and wholesale businesses. See dedicated guide: purchase order financing explained.

Prepayment Penalty

A fee charged when a borrower pays off a loan before its scheduled maturity date. Prepayment penalties compensate the lender for the lost interest income they would have received if the loan ran to term. Common structures: step-down penalties (e.g., 5-4-3-2-1 over 5 years, declining by 1% per year); yield maintenance (paying enough to compensate the lender for the full yield to term, often expensive in low-rate environments); defeasance (replacing collateral with Treasury securities of equal yield — used in CMBS loans). MCA and factor rate products have no formal prepayment penalty but also provide no savings from early payoff because the total repayment is fixed by the factor rate regardless of timing. Always understand the prepayment structure before signing a commercial loan — the cost of exiting early can be substantial. See also: commercial mortgage prepayment structures.

Prime Rate

The prime rate is a benchmark interest rate used as a reference for variable-rate commercial loans. It is traditionally defined as the rate that U.S. banks charge their most creditworthy commercial customers, and historically has been set at 3 percentage points above the Federal Funds Rate (the overnight rate the Federal Reserve sets for bank-to-bank lending). When the Fed raises rates, prime rate rises; when the Fed cuts rates, prime falls. Many commercial loans are priced as "Prime plus X points" — for example, "Prime plus 1.5%" means the loan rate equals the current prime rate plus 1.5 percentage points. SOFR (Secured Overnight Financing Rate) has largely replaced LIBOR as an alternative floating rate benchmark in commercial lending, and increasingly competes with Prime for variable-rate pricing.

R

Recourse / Non-Recourse

In the context of factoring and invoice financing, recourse and non-recourse refer to who bears the risk of customer non-payment. In recourse factoring, if a customer does not pay an invoice the factor has purchased, the business must buy back (repurchase) the uncollected invoice from the factor — the business retains the credit risk. In non-recourse factoring, if the customer cannot pay due to insolvency, the factor absorbs the loss. Non-recourse factoring is more expensive because the factor takes on more credit risk. Important caveat: "non-recourse" typically only applies to customer insolvency, not to invoice disputes, customer dissatisfaction, or returns — those situations usually put the risk back on the seller regardless of recourse structure. In commercial mortgage lending, a non-recourse loan means the lender can only pursue the collateral property in a default — not the borrower personally — though bad-boy carve-outs typically restore personal liability for fraud, misrepresentation, and intentional wrongdoing.

Renewal

In the MCA and short-term lending market, a renewal is a new advance issued to a merchant who already has an existing advance in place — typically before the existing advance is fully repaid. The renewal either pays off the existing balance and provides additional new cash on top (a buyout), or is stacked on top of the existing position. Renewals are a significant portion of MCA funder revenue because existing merchants with positive repayment history are lower risk than new applicants. From the merchant's perspective, renewal frequency and terms are important — rolling from one advance to the next without clear improvement in terms or cash position can indicate debt dependency. Renewal at better rates (lower factor rate, larger advance) is a sign of creditworthiness improvement; renewal at the same or worse terms repeatedly is a warning sign.

Residual

In ISO and broker compensation, a residual is an ongoing commission payment tied to a client's continued use of a revolving credit facility, factoring arrangement, or other product that generates fees as long as the relationship remains active. Unlike a one-time commission at funding, residuals provide recurring income. For example, an ISO who places a $500,000 factoring facility and earns a 0.20% monthly residual on the outstanding funded balance earns approximately $1,000 per month as long as the client factors at that level. Residuals are available through some factoring companies, revolving credit programs, and SBA-affiliated products. They are less common in MCA and short-term loan products. Residuals are valuable because they create recurring revenue without requiring continuous new deal origination.

Revolver / Revolving Credit

A revolving credit facility allows a borrower to draw, repay, and draw again up to the approved credit limit — unlike a term loan where principal is advanced once and repaid on a fixed schedule. The availability on a revolver fluctuates based on outstanding balance and (for ABL revolvers) the current eligible collateral base. Business lines of credit are revolving facilities. ABL lines of credit secured by receivables and inventory are revolving. Credit cards are revolving. When a revolving line is tied to collateral that fluctuates (like receivables or inventory), the available credit rises when the business is growing (more assets to borrow against) and falls when the business is contracting — which generally aligns credit availability with the business's actual capital needs. See also: working capital financing.

S

SBA — Small Business Administration

The U.S. Small Business Administration is a federal government agency that supports small businesses through a variety of programs, most importantly its loan guarantee programs. The SBA does not typically lend money directly — it guarantees loans made by approved private lenders (banks, credit unions, CDFIs), reducing lender risk and enabling access to better terms than businesses could access unassisted. The three most important SBA lending programs for small businesses are: SBA 7(a) — the general-purpose small business loan program supporting working capital, equipment, business acquisition, and real estate (maximum $5 million); SBA 504 — a two-part loan program for owner-occupied commercial real estate and major equipment (minimum 10% down payment, long-term fixed rates); and SBA Microloan — loans up to $50,000 through nonprofit intermediaries for very small businesses and startups. See also: commercial mortgage SBA programs.

Stacking

Stacking is the practice of having multiple MCA or short-term loan positions outstanding simultaneously from different lenders. Example: a business that has an active $60,000 MCA with daily payments of $800 and simultaneously takes a second $40,000 advance from a different funder, adding another $500/day in payments, is stacking. Stacking is viewed negatively by commercial lenders because: it multiplies daily payment obligations (potentially consuming more daily revenue than the business can sustain), it creates multiple blanket UCC liens on business assets (each new lender sees the prior liens and views the deal as risky), and it correlates with financial distress. Most funder agreements prohibit stacking without prior written consent. ISOs who submit stacked deals face increased clawback risk. Stacking multiple positions is one of the most reliable indicators of a business heading toward a debt crisis rather than growing. See also: blanket liens and stacking scenarios.

Subordination

A subordination agreement is a formal legal document where a senior lienholder agrees to have their security interest in specified collateral take a lower priority position relative to a new lender's security interest in the same collateral. Example: if Lender A has a blanket UCC lien and Lender B wants to provide equipment financing secured by a specific machine, Lender A executes a subordination agreement stating that with respect to that specific piece of equipment, Lender B's claim takes priority. Without subordination, Lender A's earlier-filed blanket lien automatically outranks Lender B's specific lien under the UCC first-to-file priority rule. Subordination enables new secured financing to proceed around existing blanket liens without requiring full payoff of the existing obligation. Not all lenders will subordinate — some alternative lender agreements explicitly prohibit it. See also: UCC filing priority rules.

T

Term Sheet

A term sheet (also called a Letter of Intent or LOI in some contexts) is a non-binding document summarizing the key terms of a proposed financing transaction before the final loan documents are drafted and signed. A commercial finance term sheet typically includes: loan amount, interest rate or factor rate, term or repayment period, collateral requirements, personal guarantee requirements, origination and other fees, prepayment terms, and any major conditions to closing. Term sheets allow both parties to confirm they are aligned on deal economics before investing in legal documentation. In alternative lending, formal term sheets are less common — funders often issue approvals with term summaries rather than formal term sheets. For SBA and commercial bank loans, term sheets are standard. Review every term sheet carefully — the final loan documents should mirror the term sheet, and any material deviation should be questioned before signing.

U

UCC — Uniform Commercial Code (UCC-1 Financing Statement)

The Uniform Commercial Code is a comprehensive set of commercial laws adopted by all U.S. states. In the context of business lending, the relevant section is Article 9, which governs security interests in personal property (all non-real-estate business assets). A UCC-1 financing statement is the public filing that "perfects" a lender's security interest — making it legally enforceable against third parties and establishing the lender's priority position. UCC filings are made with the Secretary of State of the state where the business entity was organized. A UCC-1 is effective for 5 years and must be renewed by the lender with a UCC-3 continuation. After payoff, the lender must file a UCC-3 termination. Every business owner should periodically search for UCC filings on their business through their Secretary of State's free online UCC search tool. See dedicated guides: how UCC filings work, blanket liens.

Underwriting

Underwriting is the process by which a lender evaluates the risk of a loan application and decides whether to approve it, at what amount, and at what terms. Commercial loan underwriting analyzes: the borrower's creditworthiness (personal and business credit scores, payment history, any derogatory items), the business's financial performance (revenue, profitability, cash flow, debt service coverage), collateral quality and value, industry risk, the purpose and economic logic of the loan, and the management and operating history of the business. Different lender types use different underwriting methods: banks and SBA lenders conduct thorough manual underwriting using financial statements and tax returns; alternative lenders rely more heavily on bank statement revenue analysis and automated credit scoring models; ABL lenders focus on collateral quality through field examination and borrowing base analysis. The strength of your underwriting package — completeness, accuracy, and the story it tells — materially affects approval odds and pricing.

W

Working Capital

Working capital is the financial measure of a business's short-term operational liquidity — the difference between current assets (cash, receivables, inventory) and current liabilities (accounts payable, accrued expenses, short-term debt obligations). Positive working capital means the business has more short-term assets than short-term obligations — it can cover its near-term liabilities from existing liquid assets. Negative working capital means the business owes more in the short term than it has in short-term assets — a potentially problematic situation that requires either generating cash from operations quickly or accessing outside financing. "Working capital financing" refers to any financing product used to fund operating expenses, inventory, payroll, or other short-term business needs — as opposed to capital expenditure financing (equipment, real estate) which funds longer-lived assets. See dedicated guide: what is working capital financing.

FAQ

Questions about commercial finance terms

What is a factor rate in business lending?

A factor rate is the pricing mechanism for MCAs — a decimal multiplier applied to the advance amount to determine total repayment. A $100,000 advance at a 1.35 factor rate requires repayment of $135,000. Unlike interest, factor rate cost is fixed regardless of repayment speed. To compare to APR: divide the cost ($35,000) by the advance ($100,000) and annualize based on expected repayment period. A 1.35 factor rate repaid in 6 months is approximately 70% APR.

What is ABL in commercial finance?

ABL (Asset-Based Lending) is lending where credit availability is determined by the value of specific business assets — accounts receivable, inventory, or equipment — rather than a fixed amount based on credit score. Borrowing availability fluctuates with the collateral base. ABL is most common for product-based businesses with significant receivables and inventory. An ABL facility combining both receivables and inventory financing is the most powerful working capital structure for distributors and manufacturers.

What is the difference between recourse and non-recourse factoring?

In recourse factoring, you must buy back unpaid invoices if your customers don't pay. In non-recourse factoring, the factor absorbs customer non-payment losses due to insolvency. Non-recourse factoring is more expensive because the factor takes on credit risk. Note: non-recourse only applies to customer insolvency, not to invoice disputes, returns, or defective goods — those remain your liability in virtually all factoring arrangements.

What does stacking mean in commercial finance?

Stacking means having multiple MCA or short-term loan positions outstanding simultaneously from different lenders. It multiplies daily payment obligations, creates multiple blanket UCC liens, and signals financial distress. Most funder agreements prohibit stacking without consent. ISOs who submit stacked deals face clawback risk. Stacking is one of the most reliable indicators that a business is heading into a debt crisis rather than growing through it.

What is subordination in business lending?

Subordination is when a senior lienholder formally agrees to let a new lender take first priority on specific collateral. It enables new secured financing (equipment loans, factoring, ABL) to proceed when an existing blanket lien would otherwise block it. Subordination requires the existing lienholder's written consent and is a formal legal agreement. Not all lenders will subordinate — check your funding agreement for subordination provisions before taking any loan with a blanket lien.

What does DSCR mean in business lending?

DSCR (Debt Service Coverage Ratio) is net operating income divided by total annual debt service. A 1.25x DSCR means the business generates $1.25 for every $1.00 of debt obligations — a 25% cushion. Most commercial lenders require 1.20x to 1.35x minimum. Below 1.0x means the business cannot cover its debt from operations. DSCR is critical in commercial real estate, SBA, and bank term loan underwriting.

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