Glossary: Typical Loan Documents and Terms

You want to submit a loan application for a small business loan. You’re confident that you’ll qualify. You’ve done some research but don’t understand the terms used. Whether it’s an application from the Small Business Administration or a loan program from a bank, these terms remain the same no matter where you apply for a small business loan.

Let FindLaw help you better understand the loan application process. Below is a glossary of typical loan documents and loan requirements terminology you should know.

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Glossary

These loan package terms are similar for most types of loans from all types of lenders.

Amortization – Amortization is repaying a debt with scheduled repayments of principal and interest.

Articles of incorporation – Business formation document that sets up the organization and states what type of business it is. Often filed with the secretary of state where the business operates. The secretary of state issues a certificate of incorporation once accepted.

Balance sheet – A balance sheet lists the assets and liabilities (debts) of a business. This includes accounts receivable, accounts payable, profits, and expenses for a certain period. A balance sheet is sometimes called a financial statement.

Bank statements – Documents from your financial institution, like a bank or credit union, that show your business’ debits and credits for the previous month.

Business credit report – A third-party report, often from a credit bureau, that shows a business’ credit for the last seven years. The credit report will show a business credit score to help determine your eligibility for getting a loan.

Business line of credit – The maximum amount a business can borrow from that lender.

Business plan – A business plan is a document that details an overview of your business, financial projections, operating budget, target markets, cash flow, marketing plan, and products or services.

Credit score – A credit score is a number assigned to a person or business. It looks at your credit history, credit card repayments, bankruptcies, liens, and any defaults. You can have a business credit score for your business and a separate personal credit score for yourself as an individual.

Collateral – This is property to secure a loan that can be seized upon failure to repay.

Default – A default is failing to perform your duty under a business loan or line of credit. This includes failing to repay your loan amount, failing to repay on time, or anything else listed in your loan agreement.

Income statement – A statement of all income for the business during a period. This includes sales of services and products or referral fees. It should show net income and gross income.

Income tax returns – An income tax return is filed with a tax authority such as the IRS that reports pertinent tax information such as income, expenses, and deductions.

Interest rate – An interest rate is a percentage rate charged on the loan amount each month. There are state interest rate laws that you should know before agreeing to a loan agreement.

Loan or credit agreement – A loan or credit agreement is the document you sign to receive loan funds. It lists the terms and conditions of your loan.

Microloan – A microloan is an SBA loan for less than $50,000.

Mortgage​ – A mortgage gives the lender a security interest in real property owned by your company.

Personal guarantee – A personal guarantee is an individual’s promise to repay the loan. Suppose the individual does not repay the full loan amount. In that case, their personal assets or their collateral can be forfeited.

Prepayment penalty – A fee a lender charges if the loan is paid off before the end of the agreed term. It typically is calculated as a percentage of the remaining balance to compensate for the lender’s lost interest income.

Principal – The original borrowed amount for a loan is the principal amount of that loan.

Promissory note – A promissory note is a contract promising to repay your loan amount. Your company must repay at a certain time and according to certain terms and conditions. Promissory notes are either unsecured or secured.

Security agreement – A security agreement gives the lender a security interest in specific personal property owned by your company. For example, in equipment financing, a lender will take a security interest in the equipment until the loan is repaid.

Term loan – A business loan for a period of time, usually one to fifteen years, with an amortization schedule.

Underwriting – Underwriting is a lender’s process of reviewing a loan application to determine the amount of risk in approving it. Underwriting considers the borrower’s credit score, credit history, and asset valuations.

Working capital – A business’ current assets after deducting its current liabilities (debts). This includes funds in bank accounts.

It does not matter if you are a new business or an existing business. Before signing a loan document, talk with a CPA and a business law attorney.

Get Help With Business Financing

If you’re a small business owner or a startup hoping to be one, you may still have legal questions about loans, mortgages, or the required documents needed to secure a small business loan. Almost all business lenders have attorneys, so you should, too. 

Entrepreneurs should meet with an experienced business law attorney about financing options before signing any paperwork with a traditional lender, credit union, or SBA loan. They can check your financial situation against your business needs to find the best move possible.