Applying for a loan can be stressful and confusing. The alternative lending world uses a lot of words and phrases that you may not be familiar with. We created this free resource for you so you can be more educated about your options and get your small business loan faster.
Alternative Lending Terms Dictionary
If you would like to jump to a specific term, please click here:
An acquirer is a sales agent that works for an ISO(Independent Sales Organization) to find and new merchants – small business owners like you-to sign up with their associated ISO.
Alternative lending is financing options outside of a bank or credit union. Alternative lending options include Merchant Cash Advances, CDFI loans, Crowdfunding, etc. These types of alternative lending are good for small businesses who do not qualify for traditional loans from a bank or credit union. However, because the types of businesses rejected by banks are often “riskier” because of credit history or type of industry, alternative lending options are typically more expensive than traditional bank loans.
APR (Annual Percentage Rate)
An APR is the cost of the borrower’s credit as a yearly rate. APR includes all loan fees and interest. This can be a helpful indicator when comparing loans and is important for understanding the true cost of a loan.
Cash Flow Analysis
Cash flow is the flow of money in and out of your business. Keeping detailed records of all income and expenses helps you better manage your business’ finances. Cash flow analysis requires keeping records and copies of transactions and regularly checking where your money is going to see if you can continue to afford what/who you are paying.
Check out our blog post to read why doing cash flow analysis is important for your small business.
CDFI (Community Development Financial Institution)
CDFIs are alternative lenders who are dedicated to helping small businesses and their communities. These privately-owned institutions help fund community-driven businesses and nonprofits. Opportunity Fund is a CDFI.
For more information about CDFIs, check out Opportunity Finance Network’s website here.
Collateral is any physical asset you have available to pledge to your loan. These assets often include cars, homes or other business properties that can be collected if you default on your loan. Typically, pledging collateral increases the likelihood of your loan being approved or the loan amount increasing.
Crowdfunding is a type of alternative funding that pools money from a group of people interested in investing in your business. These people can consist of family, friends, private investors, customers, and anyone who hears about your financial needs and wants to help. Crowdfunding can be donations or can offer rewards, such as a product or service.
Debt Service Coverage Ratio (DSCR)
A DSCR is calculated by dividing your total annual income by any current liabilities[jump link] that you are expected to pay back within the year. This ratio is one way lenders evaluate your ability to pay off a loan. A DSCR greater than 1 means that your business is able to pay off all of its current obligations. The difference between your DSCR and your DTI is that banks tend to refer to DTI for mortgages and car loans, while alternative lenders like Opportunity Fund tend to refer to DSCR.
Debt to Income Ratio (DTI)
A DTI is calculated by dividing your monthly debt payments by your monthly gross income. This ratio is one way lenders evaluate your ability to pay off a loan. The higher your DTI percentage is, the less likely you are to be approved. There is no set percentage that will disqualify you from getting a loan as it varies between lenders. The difference between your DSCR and your DTI is that banks tend to refer to DTI for mortgages and car loans, while alternative lenders like Opportunity Fund tend to refer to DSCR.
Employer Identification Number (EIN)
An EIN is a number that identifies your business to the IRS.
If your small business doesn’t have an EIN yet, you can apply for one for free and learn more about EINs here.
A FICO score is a number assigned by credit agencies that takes into account your personal past and current debt to determine your creditworthiness. Even though your FICO score is a personal credit score, it is one of many things a lender might look at when deciding if you qualify for a loan.
A fiscal year is a year in business that is not tied to the traditional January 1 through December 31 calendar year. This happens because some businesses have cycles that don’t end when the calendar does, such as retail shops that have big sales in December and big returns in January or schools who set their fiscal year to begin when classes do. In the United States, businesses have the option of either filing taxes on a fiscal year or calendar year.
ISO (Independent Sales Organization)
An ISO is a third party company, like Opportunity Fund, that works with small business owners by providing Merchant Services. They act as the liaison between you and Merchant Processing organizations like First Data, VISA, Mastercard etc.
ITIN (Individual Taxpayer Identification Number)
An ITIN is a number used by the Internal Revenue Service (IRS) for tax purposes. It is issued when an individual does not, or can not, have a Social Security Number (SSN). The IRS issues ITINs regardless of immigration status, as long as you are required to file taxes in the United States.
For more information, check out the IRS’s webpage here.
Liabilities are financial obligations your business has accrued over time and has not paid off. Liabilities are classified as either current (expected to be settled/ending within the fiscal year) or long-term (expected to take longer than a year to be settled/ended).Examples of liabilities are salaries and wages, mortgages, current unpaid debt, interest owed on debt, income taxes, lawsuits, bonds, warranty liability, and other outstanding expenses.
Limited Liability Company (LLC)
An LLC is a legal entity that may own a business and assign authority to an individual to act on behalf of the business. Many people choose to set up a corporation to protect their personal assets from legal risk associated with owning a business.
Line of Credit
A line of credit is a steady stream of capital[jump link]. If your small business has a line of credit, it can pull out more money and repay it as needed. A business line of credit is similar to your personal credit card. This financing option is a good way to build credit, but it may require collateral.
MCA (Merchant Cash Advance)
A merchant cash advance is an alternative lending option. MCAs are not traditional loans because the money you receive comes from your future sales. You repay an MCA through a percentage of each sale made with a debit or credit card.
Check out our blog post here to see how MCAs are bad for your small business and contact us if you need to refinance your MCA.
Microfinance is an industry that provides both small and big business loans outside of traditional banks. Microfinance is also loan amounts much smaller than traditional banks. Where a bank might define small business loans as 250K or higher, microfinance can consist of loans much smaller.
The difference between microfinance and alternative lending is that alternative lending is a category of lenders, while microfinance is a type of service that may be offered by alternative lenders.
A prime loan rate is a standard rate of interest set by the federal government. A lot of lending institutions will use the prime rate either as a guide for determining their own interest rates or set their interest rates to the federal standard.
A private corporation is a legal entity that may own a business and assign authority to an individual to act on behalf of the business. Many people choose to set up a corporation to protect their personal assets from legal risk associated with owning a business.
Profit is the money your business makes from sales after any costs have been subtracted. Profit is also called net income. The difference between profit and revenue is that revenue is the total earnings before subtracting any costs.
Revenue is the money your business makes from the sale of goods and services. The difference between revenue and profit is that revenue is the total earnings before subtracting any costs.
SBA (Small Business Administration)
Since 1953, the SBA has helped and protected the interests of small businesses across the United States. The SBA offers financial aid, government contracts, disaster assistance, counseling, and regional events.
Check out California’s SBA branch for more information here.
A sole proprietor is a person who owns a small business in its entirety when they have not set up an LLC or Partnership. This individual is responsible for major decisions regarding the business’ operations and assumes all the risk is the business is in trouble. This means you!
A small business is a company that typically generates less than 5 million dollars in revenue each year and has fewer than 100 employees. These numbers may vary between sources.
Small businesses are different from startups[jump link] because they are generally more stable, have been operating for longer, target a much smaller market, and get financing through loans rather than investors.
Small Business Borrowers Bill of Rights
This Bill of Rights was designed by Opportunity Fund and other alternative lenders to protect small business owners, like you, from predatory and irresponsible lenders. If you’re considering a loan from an alternative lender[jump link], make sure they have signed it.
Check out our blog post for specific details about what the Small Business Borrowers Bill of Rights covers.
A startup is a type of business. Definitions differ from a certain kind of company culture, a number of employees or board members, certain amounts of revenue, or even degree of innovation and impact. In general, a startup is a company that is new (from a few weeks to a few years) but aiming for rapid growth.
Startup companies are different from small businesses because they typically target a wider market, pursue rapid growth instead of stable establishment, and get financing through investors rather than loans.
A term loan is the most common kind of loan available to small businesses. This type of loan has fixed interest rate, fixed repayment time, and fixed number of payments. Term loans can vary in length from a few months to a few years. These are called short-term loans and long-term loans.
Being underbanked means your small business does not have the financing it needs. An underbanked business has little or no access to capital and has a significantly harder time growing.
Check out our blog post for a more in-depth definition about what being underbanked means for your small business and your community.
Underwriting is the process of reviewing your financial background and ability to repay a loan. This process usually begins once you’ve sent in all the documents requested by a loan officer. They then pass your loan file to a trained specialist to review and determine if it meets the lender’s requirements to issue a loan.
Working Capital is money a business needs to run the day to day operations. This money can be used for purchasing inventory or supplies, paying employees and vendors, etc.
For information about Opportunity Fund’s small business loans, please contact us at 866-299-8173 or firstname.lastname@example.org. For questions about your existing loan or other customer service questions, please contact us at 866-299-8173 or email@example.com.
Opportunity Fund is California’s largest and fastest-growing nonprofit lender to small businesses. In FY16, we made $60M in loans to help more than 2,200 small business owners invest in their businesses. Opportunity Fund invests in small business owners who do not have access to traditional financing. As a founding member and signatory to the Borrower’s Bill of Rights, we believe in the important role small businesses play in our community and the economy, and we aim to help owners financially succeed.
Visit us online at opportunityfundloan.org and follow us on Facebook and Twitter