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Glossary of Terms

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Accounts Payable

Accounts payable are business debts that must be paid off within a relatively short period of time, as opposed to long term debt such as mortgage loans and equipment loans. Accounts payable are short term or current liabilities (debts) as opposed to mortgage loans and equipment loans that are reported on the balance sheet as long term liabilities. 

Accounts Receivable

Money owed by customers for goods or services that have been delivered or used, but not yet paid for. On a company’s balance sheet, accounts receivables are recorded as current assets. 

Accrued Assets

These are assets on the balance sheet, other than cash, fixed assets (such as real estate, machinery & equipment, inventory) and include such items as accounts receivable, goodwill, and prepaid expenses. 

Accrued Liabilities

These are liabilities on the balance sheet such as accounts payables, interest and taxes that are owed but not yet paid or payable. 


The amount of principal reduction (repayment) on a loan or debt. Amortization payments are generally regular payments (usually monthly), made to reduce the debt along with the interest payments over the term of the loan. The term Amortization is used in connection with the periodic expensing of the cost or value of an intangible asset such as patents, trademarks or copyrights (similar to depreciation of a tangible assets well as prepaid expenses, such as subscription revenue whereby the amount prepaid is periodically included in income over the life of the subscription or prepaid expense. 

Annual Interest Rate

Annual Interest Rate is sometimes described as the stated or simple interest rate on a loan, as opposed to the Annual Percentage Rate or APR. It may not reflect the true cost of the loan – See APR. 

Annual Percentage Rate

The Annual Percentage Rate or APR is often referred to as the effective rate of interest since it will include the effects of the compounding of interest (see Compound Interest) and may include the cost of upfront fees. The APR generally reflects the true cost of the loan over its full term. 

Asset Based Financing

Asset Based Financing can be either working capital or term loans secured by assets such as accounts receivable, real estate, equipment, inventory etc. Factoring is also a form of asset based financing. 

Attorney Fees

When used in connection with business loans these are the fees generally paid by the borrower to legal counsel representing the borrowing entity and the lender for legal documentation and preparation for the closing of a loan. 

Bridge Financing

A Bridge Loan is generally a short term loan that is used by business borrowers until a longer term loan can be arranged or a scheduled event occurs which provides the funds to repay the loan. Bridge loans may be used to, among other things, acquire real estate, make improvements, put tenants in place, etc. Bridge Loans may also be referred to as Interim Loans and generally carry higher interest rates and fees than Conventional Loans or Permanent Loans (Permanent Mortgage Loan). 

Business Credit Report

A business credit report is a profile of your business that contains critical information such as payment history that lenders examine when evaluating a business loan application. Dun & Bradstreet (D&B) is a well known for issuing business reports. 

Business Line of Credit

A commercial loan that generally provides for working capital needs of a business. A working capital line (loan) is generally revolving, which means that the business can draw down on the line up to the authorized amount, repay any amount borrowed and re-draw funds as needed during the time that the “Line” is in place. It may be secured by collateral or unsecured. 

Business Valuation or Practice Valuation

The process of determining the economic value of a business or of a medical, dental, legal or similar practice. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, financing, establishing partner ownership and divorce proceedings. Often times, owners will turn to professional business valuation companies for an objective estimate of the business value. 

Capitalization Rate or “Cap Rate”

The Cap Rate is utilized in commercial real estate financing and sales transactions. It is the percentage derived by dividing the income generated from the use of the property by the value of the property. It is used to determine debt service coverage for a loan or potential return on investment. It also used for appraisal of properties whereby appraisers will use an assumed “Cap Rate” (according to market conditions) to determine the value of the property when using the “income approach” to valuation. See Commercial Real Estate Appraisal below. 

Cash For Financial Reporting Purposes

This generally refers to cash on hand and the value of assets that can be converted into cash immediately such as bank accounts. 

Certificate of Good Standing

Certificate issued by the designated authority in a State (generally the Secretary of State) to verify that a corporation or other business entity actually exists, has paid all its statutory fees, has met all filing requirements and, therefore, is authorized to transact business in that State. A Good Standing Certificate is generally required for any type of closing to take place, whether acquisition or financing. 


Collateral is the property pledged to a lender or other party to secure repayment of a loan or performance of some required task. 

Commercial Real Estate Appraisal

An estimate of the “market” value of Commercial Real Estate prepared by a licensed appraiser. Appraisers may be licensed by the State and may also be designated as an MAI appraiser (usually required by banks). When making business loans collateralized by real estate lenders will generally require the appraisal to conform to the Uniform Standards of Professional Appraisal Practice (USPAP), which sets forth guidelines for valuing property. Generally, appraisers use three methods for determining values: the “cost approach,” which refers to the value of the land and the cost to construct the building and improvements, the “sales comparison approach,” which analyzes the sales of similar properties in the area, and the “income approach,” which analyzes the income generated or projected to be generated by the use of the property and applying a capitalization rate to that number. Appraisers will often use and reconcile all 3 approaches to arrive at a value. 

Common Area Maintenance

Amounts charged to commercial tenants, generally in shopping centers, for their pro rata share of expenses to maintain hallways, restrooms, parking lots, and other common areas. 

Compound Interest

Interest is compounded when the interest due on a business loan for a given period is added to the principal amount of the loan and that amount then also accrues interest. 

Construction Loan Fees and Points

A fee charged by the lender for the construction component of a loan. The fee is typically calculated as a percentage of the total construction costs. Points can also be charged by lenders on Permanent Loans as well as by mortgage brokers and loan brokers for services rendered in connection with obtaining a loan. 

Conventional Loan – Mixed Use-Commercial

A loan, secured by a mortgage, for an investment property that may be a combination of retail, office and/or residential space. 

Conventional Loan – Mixed Use-Industrial

A loan, secured by a mortgage, for an investment property that is leased to tenants in the manufacturing and trade industries and is industrial in nature. 

Conventional Loan – Multi-Family

A commercial loan, secured by a mortgage, for a residential investment property that has two or more residential tenants. 

Conventional Loan – Owner User

A business loan, secured by a mortgage, to a borrower that uses all or substantially all of the property securing the loan for the operation of its business. Loan purposes may include the purchase or refinance of a commercial business property (owner-user), construction and improvements. 

Conventional Loan – Single-Tenant

A commercial real estate loan for an investment property that is fully leased to a single tenant. 

Cost of Goods Sold

Inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out (FIFO i.e. first purchased is first sold), or average cost. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and saleable condition. Costs of goods sold by the business include material, labor, and allocated overhead. 

Credit Reports

A report containing detailed information on a person’s credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission, to determine his or her creditworthiness. 

Credit Score Credit Score

Often referred to as the FICO score is a numerical rating determined by an analysis of your Credit Reports. The FICO scores range between 300 and 850, with the lower number allegedly representing a greater credit risk. 

Current Assets Cash

Accounts receivable, marketable securities, inventory and other assets of a business that can be converted into cash within a year. 

Current Liabilities

Current or Short Term Debt Liabilities or debts of a business that mature or become due within one year. 

Current Portion of Long Term Debt (CPLTD)

The total amount of long-term debt (such as a mortgage loan) that must be paid within a year period. 

Current Ratio

A liquidity ratio that measures the ability of a business to pay short-term obligations. It is often used by banks when evaluating business loan requests. Formula: Current Ratio = Current Assets ÷ Current Liabilities. 

Debt Service

The amount of the required periodic payments of principal and interest on a loan or other obligation. 

Debt Service Coverage Ratio (DSCR or DSC)

The amount of cash flow available to meet annual principal and interest payments on business loans and investment real estate loans. Formula: Debt Service Coverage Ratio = Net Operating Income ÷ Debt Service 

Debt to Worth Ratio or Debt to Equity Ratio

Ratio of the business’s debt to net worth. It is calculated by dividing liabilities by shareholders’ equity or the company’s net worth. The lower this ratio, the greater the size of buffer available to creditors/lenders, the higher the ratio the greater the potential risk. 

Default Interest and Late Charges

Default Interest is a higher rate of interest that is charged to a business borrower while their loan is in default (the default rate of interest will be set forth in the loan documents). Late charges are amounts that will be charged if a borrower is late in a payment that is due even though the loan is not in default. 


A form of Prepayment Penalty on commercial mortgage loans. Defeasance is technically not a prepayment but is a substitution of collateral. Generally, Treasury bonds are purchased and used as substituted collateral with maturity dates geared to provide the same return to the mortgagee. If treasury returns are low the cost to the borrower can be quite high. If treasury rates are high the borrower could potentially get a discount on prepayment. 

Deferred Maintenance

Generally this refers to maintenance of business property that is required but has not been performed or has been put off to a later date. 


In accounting, an expense recorded to deduct a business’s tangible asset’s cost over its useful life. Because depreciation is a non-cash expense, it does not impact cash flow but it does decrease reported earnings. 


An easement is the right to use all or a portion of the real property owned by another for a specific purpose such as placement of utility lines, sewer lines and rights of entry and exit. 


EBITDA is one of the measures that lenders use to evaluate a business’s creditworthiness and its ability to repay a loan. It is calculated by taking the net earnings of the company (revenues minus expenses) and then adding back interest costs, taxes, depreciation and amortization. 

Effective Gross Income (EGI)

EGI is used to analyze investment properties. It is determined by taking Gross Income less vacancy and credit losses, plus miscellaneous income. 

Environmental Indemnity

Environmental Indemnity An agreement by a business borrower or a guarantor to protect or reimburse another party (usually a lender) from any loss incurred as a result of an environmental problem. 

Environmental Site Assessment or Phase I Site Assessment

Environmental Site Assessment or Phase I Site Assessment A study of real estate to determine any unique environmental attributes, encompassing everything from endangered species to existing or potential hazardous waste to historical significance. Generally it involves visual inspection, interviews, and checking local records.