B2B Funding Glossary — 40 Terms Every Business Owner Should Know [2026]

This glossary defines 40 terms that appear in factoring agreements, equipment loan documents, merchant cash advance (MCA) contracts, and Small Business Administration (SBA) applications. Definitions are written for business owners, not finance professionals. Where a term is commonly misunderstood, we note the misconception directly.

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This glossary covers 40 financing terms across four product categories — invoice factoring, equipment financing, merchant cash advances, and SBA loans — written in plain English for business owners.

FundingCompass research, May 2026

ACH Holdback

The daily or weekly withdrawal that a merchant cash advance provider takes from your bank account via ACH (Automated Clearing House) to collect repayment. ACH holdback is typically a fixed percentage of daily deposits — for example, 12% of each day's bank deposits. Unlike card-based holdback, ACH holdback applies to all deposited revenue, not just credit card sales. (Common misconception: ACH holdback and credit card holdback are the same — they are not; ACH holdback applies to total deposits, not just card volume.)

Advance Rate

The percentage of an invoice's face value that a factor pays you immediately upon purchasing the invoice. Typical advance rates: 80–90% for general commercial invoices, up to 97% for trucking freight invoices, 70–85% for construction and healthcare. The remaining balance is held in a reserve account and released minus fees once your customer pays. A higher advance rate is not always better — it depends on your cash needs relative to your fee cost.

APR (Annual Percentage Rate)

The annualised cost of borrowing expressed as a yearly percentage, including interest and mandatory fees. APR is the standard unit for comparing financing products that quote cost differently — equipment loan rates, SBA loan rates, and business line of credit rates are all expressed as APR. Products such as merchant cash advances (factor rates) and invoice factoring (per-period fees) must be converted to APR for a true cost comparison. Equipment financing APRs range from 5.5–18% for qualified borrowers; SBA 7(a) loans run approximately 9.5–12% APR; business lines of credit range from 8–30% APR.

Accounts Receivable (A/R)

Money owed to your business for goods or services already delivered but not yet paid for. Accounts receivable appear as a current asset on your balance sheet. In the context of business financing, A/R is the asset being financed in both invoice factoring (sold) and accounts receivable financing (used as collateral for a loan). The quality of your A/R — how creditworthy your customers are, how quickly they pay — determines your financing options and cost.

Asset-Based Lending (ABL)

A broad category of financing in which loans or credit facilities are secured by specific business assets — most commonly accounts receivable, inventory, or equipment. Invoice factoring and accounts receivable lines of credit are both forms of asset-based lending. ABL lenders advance a percentage of the asset's value and hold a lien on the asset. ABL is typically easier to qualify for than unsecured loans because the lender has a specific claim on collateral.

Balloon Payment

A large lump-sum payment due at the end of a loan term, after a period of lower monthly payments. Equipment loans sometimes have balloon structures: you pay reduced monthly amounts for 48 months, then a large final payment (the "balloon") when the loan matures. Balloon loans lower your monthly payment burden but require you to refinance or have cash available at maturity. Always ask whether an equipment loan has a balloon payment before signing.

Blanket Lien

A UCC-1 security interest that covers all of a business's assets — receivables, equipment, inventory, intellectual property — rather than a specific asset. Many lenders file blanket liens as a condition of financing. The practical impact: a blanket lien from Lender A can block or complicate future financing from Lender B, because Lender B may require first-lien position on specific assets. Before signing any financing, ask whether the lender will file a blanket lien or a specific-asset lien.

Concentration Limit

The maximum percentage of your total factoring facility that can be represented by a single customer. Most factors cap concentration at 25–50% of total approved volume. Example: if your factoring facility is $500,000 and the concentration limit is 30%, no single customer's invoices can exceed $150,000 in outstanding advances at any time. Concentration limits protect the factor from single-customer default risk. If you have one dominant customer, concentration limits may reduce how much of their invoices you can factor.

Covenant

A contractual condition in a loan or credit agreement that the borrower must maintain. Financial covenants require you to maintain specific metrics — minimum revenue, minimum cash balance, maximum debt-to-equity ratio. Operational covenants may restrict what you can do without lender approval — taking on additional debt, selling assets, changing ownership. Violating a covenant is a "covenant breach" that can trigger default, accelerated repayment, or increased interest rates even if you have not missed a payment.

Daily Factor Rate

The per-day cost of an MCA expressed as a percentage of the advance amount. To convert a factor rate to a daily rate: (Factor Rate − 1) ÷ Estimated Days to Repay.

Example
Factor rate	1.30
Estimated repayment	120 days
Daily rate	0.30 ÷ 120 = 0.25% per day
Annualized	0.25% × 365 = 91.25% APR

Daily factor rates are useful for comparing MCAs with different terms, but estimates depend on assumed repayment duration — which is not guaranteed.

Daily Holdback

The fixed percentage of a business's daily credit card or debit card sales automatically deducted by a merchant cash advance provider to collect repayment. Typical daily holdback rates run 10–25%. Because the holdback is a percentage of sales rather than a fixed dollar amount, repayment slows automatically in low-revenue periods and accelerates in high-revenue periods — this flexibility is one of the primary arguments MCA providers make for their product. (Common misconception: all MCAs use holdback-based collection — some providers have shifted to fixed daily ACH debits, which eliminate this flexibility entirely. Confirm which method applies before signing.)

Debenture

In the SBA 504 loan context, the debenture is the bond issued by the Certified Development Company (CDC) to fund the SBA's 40% portion of a 504 project. SBA 504 debenture rates are fixed, set monthly, and typically range from 5.5–7% — lower than conventional equipment loan rates. The debenture is separate from the conventional lender's 50% portion, which carries market rates. When you see "SBA 504 debenture rate," it refers specifically to this CDC-issued fixed-rate portion.

Draw Period

The period during which a borrower can access funds from a revolving credit facility such as a business line of credit. Most business lines of credit have a 12-month draw period with annual renewal. During the draw period, the borrower makes minimum payments (interest-only or a small percentage of the outstanding balance) and can draw additional funds up to the credit limit at any time. At the end of the draw period, the lender reviews the facility and may renew, modify, or close it. (Compare to a term loan, which has no draw period — the full amount is disbursed at closing.)

Effective APR

The true annualized cost of a financing product, expressed as an annual percentage rate, accounting for all fees and the actual repayment timeline. Effective APR allows comparison across products that express cost differently — a factoring fee of 3%/30 days, an MCA factor rate of 1.30, and an equipment loan APR of 8% are all annual rates using effective APR as the common unit. Formula: (Total Fee ÷ Amount Financed) ÷ Days to Repay × 365. (Common misconception: the stated "rate" on an MCA is already an APR — it is not; factor rates must be converted.)

Factoring Fee

The cost charged by a factor to purchase your invoice, expressed as a percentage of the invoice face value per period (typically per 30 days). A 2% factoring fee on a $50,000 invoice = $1,000 per 30-day period. If your customer pays in 60 days, the fee doubles to $2,000. Factoring fees are sometimes structured as flat (same rate regardless of when the customer pays) or tiered (rate increases with invoice age). Always confirm which structure applies — flat fees provide cost certainty; tiered fees can be significantly more expensive on slow-paying customers.

Factor Rate

The multiplier used to calculate total repayment on a merchant cash advance. Factor rates are expressed as a decimal (e.g., 1.25, 1.40). Multiply the advance amount by the factor rate to get the total amount owed: $80,000 × 1.35 = $108,000 total repayment, meaning $28,000 in fees. Factor rates are not interest rates — they do not compound, and paying early does not reduce the total owed unless the contract has an explicit early payoff discount. (Common misconception: a 1.25 factor rate means 25% APR — it does not; it means 25% of the advance amount, not an annualized rate.)

Forbearance

A temporary agreement between a lender and borrower to pause, reduce, or restructure loan payments during a period of financial hardship. Forbearance does not forgive the debt — it defers it, often with additional interest accruing during the forbearance period. Factoring facilities rarely offer forbearance because the factor's exposure is to specific customer invoices, not to ongoing credit. Business loan and equipment loan lenders are more likely to offer forbearance arrangements. Always request forbearance before missing a payment — not after.

Guaranty Fee

A fee charged by the SBA to lenders for guaranteeing an SBA loan, typically passed on to the borrower. The guaranty fee varies by loan size and term — verify current rates at sba.gov, as the SBA adjusts these annually and occasionally waives them for certain loan sizes or programs. For SBA 7(a) loans over $150,000, the guaranty fee is typically 2–3.5% of the guaranteed portion of the loan. The fee is usually rolled into the loan amount rather than requiring upfront cash at closing. (Not to be confused with an origination fee, which goes to the lender — the guaranty fee goes to the SBA.)

Holdback

In the MCA context: the percentage of daily sales or deposits collected by the MCA provider toward repayment. In the factoring context: the reserve amount withheld from the advance — the difference between the invoice value and the advance rate. Example (MCA): 15% holdback on $5,000/day card sales = $750/day collected. Example (factoring): 90% advance rate on a $100,000 invoice = $10,000 holdback reserve. The factoring reserve is released to you minus fees after your customer pays; the MCA holdback is never returned.

Invoice Aging

The practice of categorizing outstanding invoices by how long they have been unpaid since the invoice date. Standard aging buckets: current (0–30 days), 31–60 days, 61–90 days, and 90+ days. Factors and lenders use invoice aging reports to assess the health of your receivables portfolio. Invoices in the 90+ bucket are typically ineligible for factoring and signal potential collection problems. Lenders may require an accounts receivable aging report as part of underwriting for any receivables-based financing.

Lien Waiver

A document signed by a contractor, subcontractor, or supplier waiving their right to file a mechanic's lien against a property in exchange for payment. In the construction factoring context, lien waivers are critical — factors require them to confirm that the invoiced work is not subject to lien claims that could reduce the value of the receivable. Conditional lien waivers are signed upon receipt of payment (and become effective only when payment clears); unconditional lien waivers release lien rights immediately upon signing.

Loan-to-Value (LTV)

The ratio of the loan amount to the appraised or purchase value of the collateral asset, expressed as a percentage. A $80,000 loan on a $100,000 piece of equipment is an 80% LTV. In equipment financing, LTV determines how much the lender will advance: semi-trucks and construction equipment with strong resale markets may qualify for 100% LTV (zero down payment); specialised equipment with limited resale value may only support 60–70% LTV, requiring a meaningful down payment. Higher LTV means more lender risk and typically results in a higher interest rate.

Merchant Cash Advance (MCA)

A financing arrangement in which a provider purchases a portion of a business's future receivables at a discount in exchange for immediate cash. MCAs are repaid through a daily holdback from card sales or bank deposits. They are not loans — they are structured as receivables purchases, which exempts them from usury laws in most states. Effective APRs typically range from 40–350%. MCAs are fast to fund (24–48 hours) and accessible to businesses with poor credit, but are among the most expensive business financing products available.

MCA Stacking

The practice of taking a second or third merchant cash advance from a different provider while the first is still outstanding. Each additional MCA adds a new daily holdback on top of existing ones, compounding the daily cash drain. MCA stacking is the most common path to MCA-related business failure: if total holdbacks across all advances exceed daily sales capacity, the business cannot cover operating expenses and enters a cash flow spiral. Most MCA agreements prohibit stacking without lender consent, and violation can trigger default clauses. If you are considering a second MCA to repay the first, seek alternatives immediately — SBA microloan refinancing or invoice factoring may provide a lower-cost exit.

NOA (Notice of Assignment)

A formal notification sent by a factor to your customers informing them that their invoices have been assigned to (purchased by) the factor, and that payment must be remitted directly to the factor rather than to you. NOAs are a standard part of factoring — your customers will know you are using a factor. Some customers have policies against paying third-party factors; confirm whether your key customers will accept NOAs before signing a factoring agreement. (Common misconception: you can factor invoices without your customers knowing — you cannot if a NOA is required, which it almost always is.)

Non-Recourse Factoring

A factoring arrangement in which the factor absorbs the loss if your customer fails to pay due to insolvency or bankruptcy — you are not required to repurchase the invoice. Non-recourse protection is typically limited to credit-related default (customer insolvency); it usually does not cover disputed invoices, customer deductions, or slow payment. Non-recourse factoring typically costs 0.5–2% more per period than recourse factoring. (Common misconception: non-recourse means you have no liability if a customer doesn't pay for any reason — the protection is narrower than that.)

Operating Lease

A lease in which the lessee (you) pays to use an asset for a defined period, after which the asset is returned to the lessor. Operating leases are "off-balance-sheet" under older accounting standards (pre-ASC 842) but now appear as right-of-use assets under current GAAP. Monthly payments are lower than ownership alternatives because you are paying only for the depreciation during the lease term, not the full asset value. Common for technology, vehicles, and equipment with high obsolescence rates. At lease end: return the equipment, renew, or purchase at fair market value.

Origination Fee

A one-time fee charged at loan closing as a percentage of the loan amount. Common on SBA loans (SBA guarantee fee of 2–3.5% for 7(a) loans over $150,000), equipment loans, and some factoring facilities. Origination fees increase your effective APR — a 2% origination fee on a 5-year loan adds approximately 0.4% per year to your cost. Always ask whether the origination fee can be financed into the loan or must be paid at closing. (Common misconception: origination fees are negotiable — they rarely are on SBA loans, where the fee goes to the SBA, not the lender.)

Personal Guarantee

A legal commitment by a business owner that if the business defaults on a loan, the owner will repay the debt from personal assets. Personal guarantees are nearly universal for small business financing — SBA loans legally require a personal guarantee from all 20%+ owners. The guarantee means your personal savings, home equity, and other personal assets are at risk if the business cannot pay. Unlimited guarantees have no cap; limited guarantees restrict personal liability to a specified dollar amount or percentage.

Prepayment Penalty

A fee charged for paying off a loan before the scheduled maturity date. Prepayment penalties compensate the lender for interest income lost due to early repayment. Common structures: flat fee (e.g., 2% of remaining balance), step-down (e.g., 3% in year 1, 2% in year 2, 1% in year 3), or yield maintenance (complex calculation ensuring the lender earns a target yield). Most MCA contracts have no prepayment penalty but also no prepayment discount — you owe the full factor amount regardless of timing.

Prime Rate

The benchmark interest rate that US commercial banks use as a reference for short-term business loans and lines of credit, currently 7.5% as of May 2026. The prime rate moves with the Federal Reserve's federal funds rate. SBA 7(a) loan rates are set as Prime plus an SBA-mandated spread (e.g., Prime + 2.25–4.75%), so SBA loan rates rise and fall with the prime rate. Bank business lines of credit are similarly priced as Prime plus a margin. When comparing loan offers, ask for the rate expressed as Prime plus a margin rather than a fixed percentage — this tells you how your rate will move if the prime rate changes.

Purchase Order (PO)

A formal document issued by a buyer to a supplier authorizing the purchase of specific goods at a specified price. In the financing context, purchase orders are the basis for PO financing — a lender advances funds to cover production or procurement costs against an approved PO, before delivery occurs. PO financing is distinct from invoice factoring: PO financing funds you before you deliver; invoice factoring funds you after you deliver and invoice. A single transaction can use both: PO financing for production, then factoring once the invoice is issued.

Recourse Factoring

A factoring arrangement in which you are responsible for repurchasing any invoice that your customer does not pay within a specified period (typically 60–90 days). Under recourse factoring, the credit risk stays with you — the factor is essentially providing a cash advance against your invoices, not taking permanent ownership of the receivable. Recourse factoring is cheaper than non-recourse (typically 0.5–2% lower per period) but does not transfer default risk. Most factoring arrangements in the US are recourse or have narrow non-recourse carve-outs.

Remittance

The payment made by a customer against an invoice. In factoring, once your customer remits payment to the factor, the factor deducts its fee and releases the remaining reserve balance to you. Remittance timing — how quickly customers pay after the invoice due date — directly affects your factoring cost because most fee structures are time-based. Slow-paying customers cost more to factor. "Remittance report" is also a document the factor sends you detailing all customer payments received and fees deducted during a period.

Residual Value

The estimated market value of a leased asset at the end of the lease term. In an operating lease, the lessor retains the residual value — the lessor bets that the equipment will still be worth something when you return it. This retained residual value is what makes operating lease monthly payments lower than loan payments on the same equipment: you are paying only for the depreciation during your use period, not the full asset cost. In a $1 buyout lease or finance lease, the residual value is effectively zero (or $1), which is why monthly payments are higher — you are financing the full purchase price.

Retainage

A portion of a construction contract payment (typically 5–10%) withheld by the project owner or general contractor until project completion or a specified milestone. Retainage is not factorable — it represents a contingent receivable, not a completed obligation. Construction factoring facilities typically exclude retainage from the eligible invoice calculation. Retainage can represent a significant portion of a construction company's total receivables; managing retainage collection is one of the primary cash flow challenges in construction.

Revolving Credit

A credit facility in which borrowing capacity automatically replenishes as you repay. Unlike a term loan (which you receive once and repay over time), a revolving line of credit allows you to borrow, repay, and borrow again up to the credit limit throughout the facility's term. Business lines of credit and invoice factoring facilities are both revolving in nature — as customers pay invoices, capacity becomes available to factor new invoices. Revolving credit is more flexible than term debt but typically carries higher rates and requires annual renewal.

SBA 7(a)

The SBA's primary small business loan program, providing government-guaranteed loans through approved commercial lenders. Full details are on the [SBA loan programs and funding resources](https://www.sba.gov/funding-programs/loans) page. SBA 7(a) loans range up to $5 million, with rates of approximately 9.5–12% APR (Prime + 2.0–4.25%) depending on loan amount and term. The SBA guarantee (up to 85% of the loan amount) reduces lender risk, enabling approval for businesses that may not qualify for conventional bank loans. SBA 7(a) loans are slow to fund (30–90 days) but offer better terms than most alternative lenders for qualified borrowers.

SBA 504

An SBA loan program specifically for fixed-asset purchases — equipment and commercial real estate — structured as a three-party arrangement: a conventional lender funds 50%, an SBA Certified Development Company (CDC) funds 40% at a fixed rate (currently approximately 5.5–7%), and you provide 10% down payment. SBA 504 loans range up to $5.5 million (or $5.5M for manufacturing/energy). The fixed CDC debenture rate is typically lower than conventional equipment loan rates. Drawback: 60–90 days to close and extensive documentation requirements.

SBA Express

A faster variant of the SBA 7(a) loan program that provides an SBA guarantee decision within 36 hours, compared to 5–10 business days for standard 7(a) processing. SBA Express loans are limited to $500,000 and carry a slightly higher interest rate (Prime + 4.5–6.5%) than standard 7(a) loans. SBA Express is the best SBA option when speed matters and your loan need is under $500,000. Full funding after SBA approval still takes 2–4 weeks. Not all lenders offer SBA Express — confirm your lender is an SBA Express lender before applying if speed is a priority.

SBA Preferred Lender (PLP)

A lender designated by the SBA to approve SBA loan guarantee requests in-house, without requiring SBA review of each individual application. Using an SBA Preferred Lender is the single most effective way to reduce SBA loan approval timelines. PLP lenders include Live Oak Bank, Wells Fargo, Chase, Huntington, and many regional banks. Non-preferred lenders must submit each application to the SBA for review, adding weeks to the process. Find the current PLP list at lendermap.sba.gov.

Section 179

An IRS tax provision (Section 179 of the Internal Revenue Code) that allows businesses to immediately expense (deduct in the current tax year) the full cost of qualifying equipment purchased or financed, rather than depreciating it over multiple years. The 2026 Section 179 deduction limit is $1,220,000 (indexed to inflation). The deduction applies to equipment that is put into service during the tax year — leased equipment under a $1 buyout or similar structure may also qualify. Consult a tax advisor; the full deduction phases out once total equipment purchases exceed $3,050,000.

Spot Factoring

Invoice factoring applied to a single invoice (or a small, non-recurring batch), rather than under an ongoing contract. Spot factoring requires no long-term commitment and no minimum volume — you pay a fee only when you factor. The tradeoff: spot factoring rates are typically higher than contract factoring rates (sometimes significantly so), and the approval process must be repeated for each transaction. Spot factoring is suitable for businesses with occasional cash flow needs; contract factoring is better for businesses with consistent invoice volume.

Subordination Agreement

A legal document in which a senior lender agrees to allow a junior lender's claim to take priority over the senior lender's claim on specific assets. In the factoring context, if your bank holds a blanket lien on all business assets including receivables, the factor will require the bank to sign a subordination agreement allowing the factor to hold first-lien position on your receivables. Banks often charge a fee for subordination agreements ($500–$2,000) and may take weeks to process — factor this into your timeline when setting up a factoring facility alongside an existing bank line.

UCC-1 Filing

A Uniform Commercial Code financing statement filed by a lender with the state to publicly declare a security interest in a borrower's collateral. UCC-1 filings establish lien priority — the first lender to file has first claim on the collateral. When a factor approves your application, one of the first steps is filing a UCC-1 on your receivables. A UCC-1 search at application reveals any existing liens from other lenders. You can check existing UCC filings against your business at your state's Secretary of State office. Liens must be terminated after a loan is paid off — this does not happen automatically.

Utilisation Rate

The percentage of a revolving credit facility that is currently drawn. If your business line of credit has a $100,000 limit and you have $35,000 outstanding, your utilisation rate is 35%. Lenders and business credit bureaus monitor utilisation as an indicator of financial health: sustained utilisation above 80% signals cash flow stress and may trigger a credit limit reduction at renewal. Keeping utilisation below 30% is the general benchmark for demonstrating healthy cash management. Paying down a credit line before applying for additional financing can materially improve how lenders assess your creditworthiness.

Underwriting

The process by which a lender or factor evaluates your application to determine approval, advance rate, credit limit, and pricing. For invoice factoring, underwriting focuses on customer creditworthiness, invoice quality, and your business's legal structure. For equipment financing, underwriting focuses on business financials, personal credit, and equipment collateral value. Underwriting timelines vary widely: same-day for small MCA applications; 3–5 days for factoring; 60–90 days for SBA loans. Understanding what underwriters look for helps you present your application most favorably.

Working Capital

Current assets minus current liabilities — a measure of a business's short-term financial health and operational liquidity. Working capital = Cash + Receivables + Inventory − Short-term debt − Accounts payable. Positive working capital means you can cover near-term obligations; negative working capital signals a potential cash crisis. Most short-term business financing — factoring, lines of credit, MCAs — is intended to improve working capital. Working capital financing should ideally be self-liquidating: the funded activity (invoice collection, inventory sale) generates the cash to repay the advance.

$1 Buyout Lease

An equipment lease structured so that you pay $1 at the end of the lease term to take full ownership of the equipment. A $1 buyout lease is functionally equivalent to an equipment loan — you are financing the full purchase price, and ownership transfers to you at the end. Because you are expected to own the asset, $1 buyout leases typically qualify for the Section 179 deduction. Monthly payments are higher than an operating lease (since you are paying off the full asset value) but lower than the equivalent loan due to lease tax treatment. (Common misconception: $1 buyout leases are cheaper than loans — the economics are nearly identical.)

10% Purchase Option Lease

An equipment lease in which you have the option (not obligation) to purchase the equipment at the end of the lease term for 10% of its original cost. This structure is common for equipment with significant residual value — the 10% represents a rough estimate of fair market value at lease end. Monthly payments are lower than a $1 buyout lease because the lessor retains residual value exposure. At lease end, you choose: exercise the 10% option, return the equipment, or negotiate a new lease. The 10% option may or may not qualify for Section 179 depending on lease structure — confirm with a tax advisor.

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