1. Amortization: The process of gradually paying off a loan through scheduled payments that include both principal and interest over a specified period.
2. Annual Percentage Rate (APR): The annualized interest rate charged on a loan, which includes fees and other costs, providing a comprehensive view of borrowing costs.
3. Balloon Payment: A large, lump-sum payment due at the end of a loan term, often after making smaller periodic payments.
4. Borrower’s Covenant: Legal obligations that the borrower agrees to fulfill as part of the loan agreement, such as maintaining financial ratios or providing regular financial statements.
5. Collateral: Assets pledged by a borrower to secure a loan, which the lender can seize in case of default.
6. Creditworthiness: An assessment of a borrower’s ability to repay a loan, based on factors such as credit history, income, and financial stability.
7. Debt Service Coverage Ratio (DSCR): A financial ratio that measures a borrower’s ability to cover debt obligations with operating income. It is calculated as net operating income divided by total debt service.
8. Default: Failure to meet the terms of a loan agreement, such as missing a payment or violating covenants.
9. Fixed Interest Rate: An interest rate that remains constant throughout the life of the loan, providing predictable payment amounts.
10. Floating Interest Rate: An interest rate that fluctuates over time based on a benchmark rate, such as the prime rate or LIBOR (London Interbank Offered Rate).
11. Forbearance: A temporary agreement between a lender and borrower to delay payments or modify terms during financial hardship.
12. Guarantee: A promise by a third party to pay a loan if the borrower defaults, often used to reduce the lender’s risk.
13. Interest Rate: The percentage charged on the loan principal as the cost of borrowing money, expressed annually.
14. Loan-to-Value Ratio (LTV): A ratio that measures the loan amount as a percentage of the appraised value of the collateral. Higher LTV ratios typically indicate higher risk for the lender.
15. Maturity: The date on which a loan becomes due and must be fully repaid.
16. Personal Guarantee: A commitment by an individual, often a business owner, to repay a loan personally if the business cannot.
17. Principal: The original sum of money borrowed, excluding interest.
18. Refinancing: The process of replacing an existing loan with a new loan, often with different terms such as a lower interest rate or extended maturity.
19. Secured Loan: A loan backed by collateral, which reduces the lender’s risk.
20. Term Loan: A loan with a fixed repayment schedule over a specified period, typically used for large capital expenditures.
21. Underwriting: The process of evaluating a loan application to determine the risk level and whether to approve the loan. This includes assessing financial statements, credit history, and business plans.
22. Unsecured Loan: A loan not backed by collateral, which relies solely on the borrower’s creditworthiness.
23. Variable Rate Loan: A loan with an interest rate that changes periodically, based on market conditions or a benchmark rate.
24. Working Capital Loan: A short-term loan used to finance the daily operations of a business, such as inventory or payroll.
25. Yield Maintenance: A prepayment penalty designed to compensate the lender for lost interest income if a borrower repays the loan early.
26. Credit Facility: A type of loan agreement that allows a borrower to draw funds up to a specified limit, often used for ongoing operational needs.
27. Syndicated Loan: A large loan provided by a group of lenders, structured and managed by a lead bank.
28. Bridge Loan: A short-term loan used to provide immediate financing while waiting for long-term funding or resolving a financial obligation.
29. Debt Restructuring: The process of renegotiating the terms of a loan to provide relief to a borrower facing financial difficulties.
30. Prepayment Penalty: A fee charged by the lender if a borrower repays the loan before its maturity date.
31. Commitment Fee: A fee charged by a lender for reserving funds that the borrower may draw upon under a credit agreement.
32. Drawdown: The process of accessing funds from a loan or credit facility.
33. Interest-Only Loan: A loan where the borrower only pays interest for a specified period, with the principal repaid later.
34. Leaseback Financing: A financing arrangement where a company sells an asset and leases it back to continue using it while accessing the capital tied up in the asset.
35. Subordination Agreement: An agreement that establishes the priority of claims among different lenders or creditors in the event of default or bankruptcy.
36. Revolving Credit Line: A flexible credit arrangement that allows the borrower to draw, repay, and redraw funds up to a set limit.
37. Debt Consolidation: Combining multiple loans into a single loan with a unified interest rate and repayment schedule.
38. Prime Rate: The interest rate that commercial banks charge their most creditworthy customers, often used as a benchmark for other loans.
39. Overdraft Facility: A credit arrangement that allows a business to withdraw more funds than are available in its bank account, up to a pre-approved limit.
40. Non-Recourse Loan: A loan where the lender’s recovery in case of default is limited to the collateral, without further claims on the borrower’s other assets.
This glossary provides a comprehensive overview of key terms and concepts associated with commercial loans and lending. Each term is an essential piece of the complex puzzle that defines commercial financing practices.