Commercial Loan Terminology
What Every Borrower Should Know
Commercial loan language can feel like a maze — but it doesn't have to. Whether you're financing property, expanding operations, or launching something new, understanding key terms is essential. Here’s a comprehensive glossary and guide to help you navigate business lending with confidence.
Commercial Loan Terminology
What Every Borrower Should Know
Commercial loan language can feel like a maze — but it doesn't have to. Whether you're financing property, expanding operations, or launching something new, understanding key terms is essential. Here’s a comprehensive glossary and guide to help you navigate business lending with confidence.
Essential Commercial Loan Terms
Amortization
A payment schedule showing how much of each loan payment goes toward principal and interest. Real estate loans often amortize over 20–30 years, while business loans may span 3–10 years.
Annual Debt Service
The total amount of principal and interest paid in a year on a commercial loan.
Basis Point (BPS)
1/100 of one percent. Used to describe changes in interest rates and loan fees (e.g., 350 BPS = 3.50%).
Borrower
An individual or business that receives funds and is responsible for repayment.
Bridge Loan
Short-term financing (6 months to 3 years) used while waiting for permanent funding or completing a project.
Closing Costs
Expenses incurred to finalize a loan—may include attorney fees, title searches, legal, appraisal, recording and origination fees.
Collateral
Assets pledged to secure a loan. If the loan defaults, the lender can seize the collateral (e.g., real estate, vehicles, cash) pledged to secure a loan.
Commercial Loan
A loan issued to a business entity for operational or investment purposes.
Construction Loan
Short-term financing disbursed in stages during building or renovation projects. Typically interest-only.
Construction-to-Permanent Loan
Assets pledged to secure a loan. If the loan defaults, the lender can seize the collateral (e.g., real estate, vehicles, cash) pledged to secure a loan.
Contingency Reserve
Additional funds set aside for unexpected expenses in a construction budget.
Cost Basis
The total cost of a property, including all purchase and improvement expenses, minus depreciation.
Debt Service
Scheduled payments of loan principal and interest.
Default
Failure to meet repayment terms outlined in the loan agreement.
Delinquent
A missed loan payment that is past due but not yet in default.
Demand Loan
A loan without a fixed term, repayable upon the lender’s request.
Guarantor
A person or entity legally responsible for repaying the loan if the borrower defaults.
Hard Costs
Tangible construction expenses like labor, materials, and equipment.
Interest
The cost of borrowing money, expressed as a percentage.
Interest Rate
The percentage charged on the loan principal for borrowing funds.
Late Fee
A penalty for missed or late payments, as defined in the loan agreement.
Lender
The person or institution providing loan funds.
Loan Agreement
A legal contract outlining loan details: terms, repayment schedule, interest, default terms, etc.
Loan Origination Fee
Charged by the lender to process and fund the loan; often a percentage of the loan amount.
Loan Term
The duration over which the loan must be repaid.
Loan-to-Cost (LTC) Ratio
Compares the loan amount to the total cost of a construction project. Lower LTC = lower lender risk.
Loan-to-Value (LTV) Ratio
Compares the loan amount to the appraised property value. Commonly used in real estate lending.
Line of Credit
A revolving loan that provides flexible access to capital for business operations.
Maturity Date
The date on which the entire loan balance becomes due.
Origination Date
The date when the loan is officially funded.
Prime Rate
The interest rate banks charge their most creditworthy clients. Often used as a base rate for loans.
Principal
The original amount borrowed, excluding interest.
Promissory Note
A signed, legally binding document outlining the borrower’s promise to repay the loan.
Secured Loan
A loan backed by pledged collateral. The lender can seize assets in case of default.
Soft Costs
Non-physical costs in construction (e.g., permits, design fees, legal, and financing charges).
Underwriting
The process of evaluating loan risk based on credit, financials, and property value.
Unsecured Loan
A loan not backed by collateral; generally hi gher interest due to increased lender risk.
Variable Interest Rate
An interest rate that adjusts based on market index movements, as detailed in the loan agreement.
Key Characteristics of Commercial Loans
Purpose: Business-only financing (not personal use)
Debt-Based: Borrowed funds to be repaid over time
Collateral: Often required to secure the loan
Structure: Term loans or revolving lines of credit
Risk: Evaluated based on financial strength and repayment ability
Rates: Typically higher than consumer loans
Types of Commercial Loans
Type
Description
Term Loans
Fixed loan amounts, repaid over 1–10 years
Lines of Credit
Flexible borrowing as needed
Commercial Mortgages
Financing or refinancing business real estate
Bridge Loans
Short-term gap financing
Working Capital Loans
Covers daily expenses like payroll, inventory
Equipment Financing
For machinery, vehicles, or technology
What Lenders Look For
Financial Statements: Revenue, profit, and cash flow
Creditworthiness: Business credit score and payment history
Collateral Value: Appraised property or asset strength
Business Plan: Strategy and long-term vision
Industry Analysis: Stability and growth potential of your sector
Understanding Loan Terms
Element
Details
Repayment Term
Typically 1–10 years, longer for real estate
Interest Rate
Fixed or variable
Collateral
Often required
Amortization
May be longer than the loan term
Down Payment
20–30% for real estate loans
Ready to Take the Next Step?
Understanding the language of commercial loans
empowers your business to borrow
smarter, grow faster, and plan more confidently.
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