Need funding for your SMB?
Whether you’re looking to stabilize your cash flow, cover surprise expenses, or expand your business, financing can help you move from surviving to thriving.
Even better? You don’t have to be a financial expert to understand the basics of loans and alternative funding.
All you need is a little clarity on the language you’ll encounter along your entrepreneurial journey.
This glossary of common small business financing terms was designed exactly for that. Below, we help take the confusion out of capital, one term at a time!
General Financing Terms
Whatever type of small business financing you’re interested in, these key terms tend to pop up pretty much everywhere.
Knowing what they mean can help you feel more confident and in control, whether you’re speaking with a potential funder, filling out an application, or simply researching your options.
Balance Sheet
A snapshot of your business’s financial state at a specific point in time—including what you own (assets), what you owe (liabilities), and what’s left over (equity) for you or your shareholders.
Business Credit / Credit History
Your company’s borrowing and repayment reputation, reflecting how well you manage debt. Your business credit can affect your ability to get financing or favorable supplier terms.
Business Credit Report
A detailed financial profile of your business, compiled from creditors, public records, and official filings to show your financial reliability. Your report may include payment history, risk scores, debts, legal issues, and more.
Business Credit Score
A number, typically 0–100, that sums up your business’s trustworthiness (aka “creditworthiness”) for receiving and repaying debt. A higher score means you are seen as lower risk and more reliable by funders. We have talked about how to improve your business credit score before.
Business Plan
A roadmap that outlines how you will organize, run, and grow your small business. Your business plan not only sets internal direction, but can also demonstrate to investors or funders that you’ve thought through opportunities, challenges, and risks.
Cash Flow Statement
A report that tracks your SMB’s cash inflows (what’s coming in) and outflows (what, and where, it’s going out) over a specific timeframe. A cash flow statement helps businesses see how effectively they are managing their cash.
Financial Ratios
Simple math formulas that compare two figures from your financial statements to show how your business is doing financially—enabling SMB owners to spot issues, track trends, and plan smarter.
Funder
A person or company that provides money to your small business, whether through revenue-based financing, traditional loans, or other financial products. Funders expect repayment (or results) and help fuel SMB growth or cash flow.
Income Statement
Also known as a “profit and loss statement” or “P&L statement,” this financial document shows your business’s revenue, expenses, and profit (or loss) over a set period. It can also tell you whether your SMB is earning more than it’s spending.
Merchant
A business that sells goods or services. If you accept customer payments—especially credit or debit cards—you may also use a “merchant account” to process transactions securely.
Principal
The original amount of money borrowed, not including interest and/or fees.
Repayment Schedule
How frequently you are expected to make payments to the funder. This may be daily, weekly, monthly, or another time frame.
Underwriting
The process a funder uses to assess your business’s risk before approving financing. Funders may review things like credit history, credit score, cash flow, and debt to decide whether to fund you—and on what terms.
Working Capital
Cash you have available for everyday business operations. In other words, working capital is what’s left after paying short-term debts like payroll, inventory, and supplier bills.
Traditional Lending
Traditional lending refers to business financing provided by banks or credit unions, usually in the form of term loans or lines of credit, based on an SMB owner’s financial history and likelihood of repayment.
If you are exploring this route, here are some common terms you’re likely to encounter during the application and approval process.
APR (Annual Percentage Rate)
A key number that lenders use to show you how expensive a loan is. The APR reflects the total yearly cost of borrowing, including interest and fees.
Amortization
A long-term repayment plan/schedule that spreads out your loan payments over time, combining interest and principal.
Balloon Payment
A large, lump-sum payment you must often make at the end of a loan term—even if your cash flow is tight at that time.
Collateral
Assets, like equipment or property, that SMB owners must pledge in order to secure financing. If you cannot repay your debts, the lender can then take your collateral.
Covenants
Rules that your business must follow in order to qualify for financing. Traditional lending often comes with strict covenants that can limit SMBs’ flexibility.
EBITDA
A common approach used by funders to evaluate your company’s Earnings Before Interest, Taxes, Depreciation, and Amortization to determine performance and lending eligibility.
Interest Rate (Fixed or Variable)
The cost of borrowing, expressed as a percentage. Lower interest rates are often reserved for businesses with excellent credit and financial history. Fixed rates are static, while variable rates can change.
Line of Credit
A popular type of traditional lending, which enables businesses to access funds up to a limit as needed. Traditional banks often require strong financials and a solid track record to qualify.
Origination Fee
A one-time, upfront fee you must pay for processing your loan.
Personal Guarantee
A legal agreement required by many traditional lenders, where the SMB owner personally promises to repay the loan if their business cannot.
Prepayment Penalty
A commonly charged fee for paying off your traditional financing too early.
Secured Loans
Loans that require collateral to qualify.
Term Loans
Loans with a fixed repayment schedule over a set period. Approval often depends on strong credit, collateral, and consistent revenue.
Unfortunately, securing a traditional loan these days isn’t exactly easy for SMBs. With stringent credit requirements, lengthy applications, and even longer wait times, it’s no wonder only about 1 in 4 small business applications are actually approved.
That’s why more and more merchants are turning to alternative funding.
Types of Alternative Financing
Put simply, “alternative financing” refers to non-bank funding options, often offered by fintech and other digital companies.
Designed to be faster and more flexible than traditional loans, these solutions often skip the strict requirements like collateral, balloon payments, and prepayment penalties. As a result, alternative financing is much more accessible to SMBs.
The most popular types of alternative financing for small businesses include the following.
Business Line of Credit
A flexible, revolving loan that allows your SMB to borrow money up to a set limit and pay interest only on used funds. Unlike a traditional line of credit offered by banks, this option offers faster access. However, it may also carry higher rates or fees.
Crowdfunding
A type of online financing where businesses raise money from a group of backers in exchange for equity, rewards, or goodwill. Potential drawbacks may include platform fees, major competition for investor dollars, and pressure to meet campaign commitments.
Equipment Financing
Enables your business to buy or lease tools and machinery without paying upfront for them. Payments are spread over time, with the equipment often serving as collateral. Interest, fees, and missed payments can increase costs or risks.
Revenue-Based Financing (RBF)
Provides a lump sum, which your SMB must repay through a percentage of future sales. Payments adjust with revenue, making RBF ideal for seasonal or growing businesses. You keep equity and need no collateral. However, repayments may take longer during slower periods.
Want a deeper dive into each of the options listed above? Check out this article from Bitty.
Types of Revenue-Based Financing
Also known as RBF, revenue-based financing is Bitty’s specialty—and a great option for SMBs who want quick access to working capital without dealing with the hassles and red tape of traditional loans.
Here’s a breakdown of common terms you’ll see when exploring RBF options or contracts.
Recurring Revenue Financing
Ideal for software-as-a-service (SaaS) and membership-based businesses, RRF enables SMBs to secure capital based on predictable subscription income.
- Advance rate: The percentage of recurring revenue a funder is willing to offer, based on your company’s MRR or ARR metrics.
- Annual recurring revenue (ARR): The total predictable revenue your SMB can expect from subscriptions over a year.
- Churn rate: Measures the percentage of your customers who cancel subscriptions during a given period.
- Customer lifetime value (CLTV): Estimates the total revenue a business earns from a customer over their relationship. The higher the CLTV, the stronger your borrowing potential.
- Customer acquisition: The process of attracting new customers, with more customers meaning increased recurring revenue for your business.
- Customer acquisition cost (CAC): The total cost of acquiring a new customer, including marketing and sales expenses. A lower CAC can boost your funding amount.
- Draw schedule: Outlines how and when borrowed funds are disbursed over time, often tied to recurring revenue milestones or business performance metrics.
- Growth capital: Funding used to expand your business operations, enter new markets, or scale products.
- Monthly recurring revenue (MRR): A key metric that funders use to assess your SMB’s financing limits and repayment ability.
- Non-dilutive: A type of financing that allows your business to raise capital without giving up ownership.
- Revenue multiple: A method that compares your SMB’s revenue to its financing or valuation amount. Often used to structure loan terms.
- Revenue performance monitoring: The process of tracking recurring revenue metrics like MRR, churn, and growth trends to assess your SMB’s financial health and loan performance.
- Revenue run rate: A metric that estimates your annual revenue based on current monthly or quarterly earnings. Useful for forecasting growth and determining eligibility.
- Retention rate: The percentage of customers who remain subscribed to a business over time. High retention helps prove your business model is working, supporting better financing outcomes.
Invoice Factoring
If your small business deals with unpaid invoices, invoice factoring lets you sell them for immediate cash, while the factoring company handles collections.
- Accounts receivable (A/R): Money owed to your SMB by customers in exchange for goods or services.
- Advance rate: Upfront cash, usually 70–95% of the invoice value, that a factoring company provides when it “buys” your invoice.
- Closing costs: Startup or setup fees charged when beginning a factoring relationship.
- Client: Your SMB, if you are selling invoices to a factoring company.
- Collections: Payments made by your customers that go directly to the factoring company, since they now own the invoice.
- Customers/Debtors: Your customers—the ones who buy/bought your product or service and are responsible for paying the invoice to the factoring company.
- Day sales outstanding (DSO): A metric that reflects how many days, on average, it takes your customers to pay you. A lower DSO means faster payments.
- Factoring company: The lender that buys your invoices, gives you upfront cash, and collects payments from your customers.
- Factoring fee: A small percentage fee (often 1–5%) the factoring company charges for its service, deducted from your final payment or reserve.
- Funding period: The time between the factoring company purchasing your invoice and when your customer pays it in full.
- Notice of assignment (NOA): A formal notice sent to your customers informing them that invoice payments must now go to the factoring company, not your business.
- Rebate/Reserve: The leftover balance (after the advance) held by the factoring company and paid to you once your customer pays the invoice, minus fees.
- Recourse factoring: If your customer doesn’t pay the invoice, your business (as the client) must repay or buy it back from the factoring company.
- Recourse period: The time limit the factoring company gives your customer to pay before requiring you to repurchase the unpaid invoice.
Working Capital Advance (Merchant Cash Advance)
For speedy access to funds, a working capital advance provides upfront cash, which your SMB repays over time via a portion of your future sales. Meanwhile, repayment amounts fluctuate depending on how much money your business is bringing in.
- Automated clearing house (ACH): An electronic network used to automatically debit payments from your SMB bank account—often on a daily, weekly, or monthly basis—as part of repayment.
- Advance/Approved amount (or purchase price): The amount of cash your business receives upfront from the funder.
- Broker and independent sales organization (ISO): A sales intermediary who connects your SMB with a funder, often for a commission. ISOs are generally companies, while brokers are individual professionals.
- Factor rate: A decimal, usually ranging between 1.1 and 1.5, that is used to calculate total repayment. It is multiplied by the advance amount to determine the total payback.
- Funder: The company providing the working capital in exchange for a portion of your future business receivables.
- Holdback: The fixed percentage of your daily or weekly sales withheld and sent directly to the funder as repayment.
- Merchant/Seller: The SMB owner receiving the cash advance (you) in exchange for a portion of your future sales or receivables.
- Payback/Purchase amount: The total amount to be repaid, calculated by multiplying the advance amount by the factor rate.
- Remittance: The amount withdrawn from your account as repayment for your working capital advance.
- Remittance true-up: An adjustment to the amount withdrawn. This is based on actual sales, to ensure repayments align with your SMB’s performance.
- Stacking: Taking out more than one advance at a time from different funders. Doing so may breach contract terms.
- Syndication: When various funders jointly finance a single cash advance, sharing risk.
- Term length: The estimated time period to repay the advance, often listed in months or number of payments.
- Uniform commercial code filing (UCC): A public record filed by the funder, giving them legal rights to collect against your assets in case you default on payments.
Financing Confidence Starts Here: Bitty Supports Every SMB Journey
Congratulations! You now have a firm handle on some of the most common small business financing terms.
We encourage you to keep this glossary handy and use it as your go-to resource whenever you’re exploring funding options, reviewing offers, or just trying to make sense of the fine print.
Looking to grow your team, invest in marketing, buy inventory, or just keep things running smoothly? Bitty makes funding simple, fast, and tailored to your unique needs.
Whether you’re running a food truck or salon, managing an online retail shop, or scaling a logistics operation, Bitty can help you access the working capital you need so you can focus on what matters most—growing your business.
Now that you’re fluent in financing lingo, why wait? Apply for revenue‑based financing with Bitty today.
