Commercial funding glossary

An advance rate is the percentage of an invoice or asset value that a funder pays upfront.

In invoice factoring, advance rates typically range from 80% to 90%, with the remainder paid, minus fees, when the customer pays.

Related: Invoice factoring

After-repair value is the estimated market value of a property once planned renovations are complete.

Fix and flip and construction funders often cap the total loan at a percentage of ARV, commonly 65% to 75%.

Related: Fix and flip loans

A balloon payment is a large remaining loan balance that comes due at the end of a loan term shorter than its amortization period.

Borrowers usually pay a balloon through a refinance or sale of the property.

A bridge loan is short-term financing that covers a property or business until long-term financing is in place or the asset is sold.

Commercial real estate bridge loans typically run 12 to 36 months and are often interest-only.

Related: Bridge loans

BRRRR is a real estate investing strategy that stands for buy, rehab, rent, refinance, and repeat.

Investors often use a fix and flip loan for the purchase and rehab, then refinance into a DSCR loan once the property is leased.

Related: DSCR loans

A cap rate is a property net operating income divided by its value or purchase price, expressed as a percentage.

For example, a property with $80,000 in NOI purchased for $1,000,000 has an 8% cap rate.

A cash-out refinance replaces an existing loan with a larger one and pays the difference to the borrower in cash.

Investors commonly use cash-out refinances to fund the next acquisition, subject to leverage limits.

A draw is a release of loan funds for completed work on a renovation or construction project.

Funders usually inspect the work before releasing each draw and may charge a draw or inspection fee.

Debt service coverage ratio measures how well a property income covers its debt payments, calculated as income divided by debt service.

A DSCR of 1.25 means income is 25% higher than the loan payments. Commercial loans usually use annual net operating income, while residential DSCR loans usually compare monthly rent to the monthly payment.

Related: DSCR loans

An exit strategy is the plan for repaying a short-term loan, typically through a refinance or a sale.

Bridge, fix and flip, and construction funders review the exit strategy closely during underwriting.

A factor rate is a decimal multiplier used to calculate the total payback on revenue-based funding.

Multiply the amount funded by the factor rate to get the total repaid. $50,000 at a 1.30 factor rate equals $65,000. A factor rate is not the same as an annual interest rate.

Related: Working capital

Hard costs are the direct physical costs of construction, such as labor, materials, and site work.

Soft costs, by contrast, include items such as architecture, engineering, permits, and financing fees.

A holdback is the percentage of daily or weekly receivables remitted to a funder until a revenue-based advance is repaid.

In real estate, holdback can also mean loan funds set aside for renovation and released through draws.

An interest-only loan requires payments of interest only for a set period, with no principal reduction during that period.

Bridge, fix and flip, and construction loans are commonly interest-only.

Loan to cost is the loan amount divided by the total project cost, expressed as a percentage.

Total cost usually includes the purchase price or land, hard costs, and soft costs.

Loan to value is the loan amount divided by the appraised value of the property, expressed as a percentage.

A $750,000 loan on a $1,000,000 property is 75% LTV. Lower LTV usually means less risk to the funder.

A merchant cash advance is a purchase of a portion of a business future receivables in exchange for an upfront lump sum.

MCAs are typically repaid through a holdback or fixed daily or weekly payments and priced with a factor rate.

Related: Working capital

Net operating income is a property total income minus its operating expenses, before debt payments and income taxes.

NOI drives commercial property value and is the basis for DSCR and cap rate calculations.

A non-recourse loan limits the funder recovery to the collateral, so the borrower is not personally liable beyond standard carve-outs.

Carve-outs commonly include fraud, misrepresentation, and environmental issues.

An origination fee is a charge for processing and funding a loan, usually expressed as a percentage of the loan amount.

A personal guarantee is a promise by a business owner to repay a business debt personally if the business cannot.

Most small business and investor loans require a personal guarantee from owners above a set ownership percentage.

PITIA is the total monthly housing payment, made up of principal, interest, taxes, insurance, and association dues.

Residential DSCR loans typically divide monthly rent by PITIA.

Points are upfront fees on a loan, where one point equals 1% of the loan amount.

A prepayment penalty is a fee charged when a loan is paid off before a specified date.

Common structures include step-down schedules such as 5-4-3-2-1, yield maintenance, and defeasance.

The prime rate is a benchmark interest rate that banks use to price many variable-rate business loans.

SBA 7(a) loan rates are commonly quoted as Prime plus a margin.

Recourse is a funder right to recover losses from the borrower or seller beyond the collateral.

In factoring, recourse means you must buy back invoices that your customer does not pay.

A rent roll is a list of every unit in a property with its tenant, lease dates, and current rent.

Revolving credit is a credit limit you can draw on, repay, and draw on again during the draw period.

Related: Business line of credit

An SBA 504 loan finances major fixed assets, such as owner-occupied real estate or heavy equipment, through a bank and a Certified Development Company.

Related: SBA loans

An SBA 7(a) loan is a business loan made by an approved lender and partially guaranteed by the U.S. Small Business Administration.

Uses include working capital, acquisitions, equipment, refinancing, and owner-occupied real estate.

Related: SBA loans

Stacking is taking more than one revenue-based advance at the same time from different funders.

Stacking increases daily payment pressure and can make it harder to qualify for future funding.

A UCC filing is a public notice, filed with a state, that a funder has a security interest in a borrower business assets.

Formally called a UCC-1 financing statement. It is typically terminated once the obligation is paid.