Glossary

SBA financing terms, in plain English.

Short definitions of the vocabulary lenders use. Specific rules and numbers live in the guides, where they are flagged for verification.

Add-back #: An expense added back to reported earnings because it will not continue after a deal, or is personal to the current owner (for example a one-time legal bill, or an owner's personal costs run through the business). Lenders test add-backs against tax returns and records, and are conservative with ones they cannot verify. Full explanation →
Amortization #: The schedule over which a loan is repaid. A longer amortization means lower payments but more total interest.
Appraisal #: An independent estimate of a property's market value, ordered by the lender. It helps size the loan and supports the collateral. Read more →
Balloon payment #: A large final payment due at the end of a loan whose regular payments did not fully repay it. Common in conventional commercial real estate loans, which is one reason their payments can look lower than their true cost.
Certified Development Company (CDC) #: A nonprofit, community-based lender certified to deliver the SBA 504 program. It funds the second loan in a 504 project, alongside a bank's first loan. Full explanation → Guide →
Change of ownership #: The SBA term for a business purchase, including a partner buyout. It carries its own requirements on buyer cash, seller notes and cash-flow coverage. Full explanation → Guide →
Collateral #: Assets that back a loan, such as real estate, equipment or other business and personal assets. Lenders typically weigh collateral alongside, not instead of, cash flow.
Debenture #: A form of long-term debt. In the SBA 504 program, the Certified Development Company's portion is funded through an SBA-backed debenture. Read more →
Debt service #: The total principal and interest a borrower must pay on its debts over a period, usually a year. The denominator in a debt service coverage ratio. Full explanation → Guide →
DSCR (debt service coverage ratio) #: Cash available for debt payments divided by those payments. Above 1.0x there is some cushion; lenders set minimums and prefer margin above them. Full explanation → Guide →
Earnout #: Part of a purchase price paid to the seller later, only if the business meets agreed targets. Treated differently from a fixed seller note in an SBA-financed purchase. Full explanation → Guide →
EBITDA #: Earnings before interest, taxes, depreciation and amortization. A common starting point for a business's cash flow, before lender adjustments.
Equity injection #: The portion of a project paid for with the buyer's own money, in addition to the loan. In a purchase it must be documented, and rules limit what can count toward it. Full explanation → Guide →
Global cash flow #: A combined view of the business and the owner's household: all income, all debt payments, personal taxes and living costs. Lenders use it because a healthy business can sit inside a stretched household. Full explanation → Guide →
Guarantor #: A person or entity that promises to repay a loan if the borrower cannot. Owners of the business are often the guarantors.
Letter of intent (LOI) #: A document in which buyer and seller agree in principle on price and key terms before final contracts. Financing structure is far easier to shape before it is signed.
Lien #: A legal claim on an asset that secures a loan. A first lien is paid ahead of a second lien if the asset is sold.
Owner-occupied real estate #: A property your business actually uses, as opposed to one held mainly as an investment. SBA programs test how much of the building the business occupies. Read more →
Owner's draw #: Money an owner takes out of a business as income, as opposed to a salary. Lenders look at what pay the business can support for whoever runs it. Read more →
Personal financial statement (PFS) #: A signed summary of an individual's assets, liabilities and income. SBA lenders collect one from guarantors; SBA Form 413 is the SBA's version. Full explanation → Guide →
Personal guaranty #: A personal promise by an owner to repay a business loan if the business cannot. SBA rules require it from anyone who owns 20% or more. Full explanation →
Phase I environmental report #: A review of a property's history and surroundings for contamination risk, commonly ordered when buying commercial real estate.
Prepayment penalty #: A charge for paying a loan off early. Ask about it before you sign, especially if you might sell or refinance.
Prime rate #: A benchmark rate that many variable-rate business loans are priced from, with a spread added on top.
Pro forma #: A projection of financial results assuming a deal happens, for example the business's cash flow with the new loan payments included.
Quality-of-earnings (QoE) review #: An independent analysis of a target business's earnings that tests whether reported profit is real and repeatable. SBA rules require one on most acquisitions with a business purchase price of $3 million or more. Full explanation →
SBA 504 loan #: An SBA program for owner-occupied real estate and major equipment, structured as a bank first loan plus a CDC second loan. Read more →
SBA 7(a) loan #: The SBA's most flexible loan program. A lender makes the loan and the SBA guarantees part of it to the lender. Used for acquisitions, equipment, real estate and working capital. Read more →
SBA Form 159 #: The SBA's Fee Disclosure Form and Compensation Agreement, which identifies any agent involved in a 7(a) or 504 loan and the fees the agent is paid. Full explanation → Guide →
SBA guaranty #: The SBA's promise to reimburse a lender for part of a loss if the borrower defaults. It protects the lender; the borrower still owes the full loan.
SBDC (Small Business Development Center) #: A network of centers, often hosted by universities or economic development organizations, that offer free or low-cost advising to small businesses. A good first call for smaller or shorter-term needs.
Seller note #: Financing from the seller for part of the purchase price, repaid over time. It can be on standby or paying, and the difference matters to the lender. Full explanation → Guide →
Seller's discretionary earnings (SDE) #: A measure common in small-business sales: earnings before the owner's pay and benefits, interest, taxes and non-cash items. Lenders translate it into their own cash flow, so it is a starting point, not the answer. Full explanation → Guide →
SOP 50 10 #: The SBA's Standard Operating Procedure for 7(a) and 504 lending, the rulebook lenders follow. It is revised periodically; the current version is SOP 50 10 8.1, effective October 1, 2026.
Sources and uses #: A table of what a project costs in total (uses) and where each dollar comes from (sources). The starting point for structuring any acquisition or purchase. Full explanation → Guide →
Standby (seller note) #: An arrangement in which the seller agrees not to be paid on a note for a set period, and the note sits behind the SBA loan, so it does not compete for the borrower's cash flow. Full explanation → Guide →
Subordination #: An agreement that one lender's claim ranks behind another's. A standby seller note is typically subordinated to the bank loan. Read more →
Use of proceeds #: What the loan money will be spent on. Lenders want it specific, and it has to be a purpose the program allows.
Valuation multiple #: A business's price or value divided by a measure of its earnings, such as SDE or EBITDA. Shorthand for comparing businesses; only as good as the earnings behind it. Full explanation → Guide →
Working capital #: Cash used to run the business day to day: payroll, inventory, receivables cycles. Often included in an acquisition project cost. Read more →

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