SBA Loan Glossary
54 terms you will meet on an SBA loan or a business purchase, in plain English. Where there is an SBA rule behind a term, the definition links to it.
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- 504 loan
- An SBA program for fixed assets, mainly owner-occupied real estate and heavy equipment. A bank lends part of the project, a Certified Development Company lends another part backed by an SBA debenture, and the borrower puts in the rest.The SBA rule →
- 7(a) loan
- The SBA's main loan program. A bank or other lender makes the loan and the SBA guarantees part of it. It can pay for buying a business, real estate, equipment, working capital and refinancing, up to $5 million.The SBA rule →
A
- Add-backs
- Expenses added back to a business's profit to show what it earns for a new owner: the seller's own pay, one-time costs, personal expenses run through the business. Each one should be documented, because buyers and lenders test them.
- Affiliation
- When the SBA counts other businesses tied to you by ownership or control as part of your business. It matters for whether you are under the size standard.The SBA rule →
- Amortization
- Paying a loan down with equal monthly payments that cover interest and principal, so it is fully repaid by the end of the term.Payment calculator →
- Annual service fee
- A yearly SBA fee on the guaranteed part of a 7(a) loan. The lender pays it, and it is not passed to the borrower.The SBA rule →
- Appraisal
- An independent valuation of real estate or equipment that secures the loan. Whether one is required depends on what is being financed and its value.The SBA rule →
- Asset purchase
- Buying a business's assets (equipment, inventory, goodwill, the name) rather than the company itself. The seller keeps the legal entity and generally its liabilities.The SBA rule →
B
- Balloon payment
- A large lump sum due at the end of a loan that was not fully paid down by its regular payments.The SBA rule →
- Business valuation
- An independent estimate of what a business is worth. SBA lenders use one to support the price on many acquisitions.The SBA rule →
C
- CAIVRS
- A federal database of people and businesses that are delinquent on, or defaulted on, federal debt. Lenders check it for every SBA applicant.The SBA rule →
- Certified Development Company (CDC)
- A nonprofit licensed by the SBA to make the SBA-backed part of a 504 loan.The SBA rule →
- Change of ownership
- The SBA's term for buying a business, whether the whole company or a partner's share. It has its own rules for down payment, seller involvement and valuation.SBA loans to buy a business →
- Closing costs
- The costs of getting the loan done besides the guaranty fee: valuation, appraisals, environmental reports, title, legal and packaging. Most can be financed into the loan.The SBA rule →
- Collateral
- Property pledged to secure the loan, so the lender can recover from it if the loan is not repaid. SBA lenders take available business assets and, where needed, personal real estate.The SBA rule →
- Credit elsewhere test
- The requirement that the borrower cannot get the same financing on reasonable terms without the SBA guarantee. The lender documents it.The SBA rule →
D
- Debt service coverage ratio (DSCR)
- The cash a business has available to pay debt, divided by the debt payments due. A DSCR of 1.25 means $1.25 for every $1.00 owed. Lenders commonly look for 1.25 or higher.DSCR explained →
- Down payment (equity injection)
- The money the borrower puts into the deal. For buying a business or a startup it is at least 10% of the total project, which includes costs as well as the price.The SBA rule →
- Due diligence
- The buyer's investigation of a business before closing: its finances, taxes, customers, contracts, staff and legal position.
E
- Earnout
- Part of the purchase price paid later, only if the business hits agreed targets after closing.The SBA rule →
- EBITDA
- Earnings before interest, taxes, depreciation and amortization. A measure of operating profit used to price larger businesses.
- Environmental review
- A check of real estate pledged to the loan for contamination risk. It ranges from a questionnaire to a Phase I report, depending on the property.The SBA rule →
F
- Fixed rate
- An interest rate that stays the same for the life of the loan, instead of moving with Prime.The SBA rule →
- Franchise Directory
- The SBA's list of franchise brands whose agreements have been reviewed for SBA eligibility. Lenders check a brand against it.The SBA rule →SBA franchise data →
- Full standby
- A seller note that receives no payments of principal or interest for the whole life of the SBA loan. Only a note on full standby can count toward the down payment.The SBA rule →
G
- Goodwill
- The part of a business's price above the value of its hard assets: its name, customers and earning power. Most of the price of a service business is usually goodwill.The SBA rule →
- Guaranty
- The SBA's promise to repay the lender part of a loan if the borrower defaults. On a 7(a) loan it is 85% of loans up to $150,000 and 75% above.The SBA rule →
- Guaranty fee
- A one-time SBA fee on a 7(a) loan, charged on the guaranteed portion and usually financed into the loan.The SBA rule →
I
- Interest-only period
- A stretch at the start of a loan when payments cover interest but not principal.The SBA rule →
L
- Lender service provider (LSP)
- A firm a lender hires to handle parts of its SBA lending, such as packaging or servicing.
- Letter of intent (LOI)
- A short letter setting out the main terms of a business purchase (price, payment, diligence period, exclusivity) before the purchase agreement is drafted. Mostly non-binding.
- Loan broker
- Someone who helps a borrower find the right lender and get the loan through. Fees paid to a broker are disclosed to the SBA.The SBA rule →What an SBA loan broker does →
M
- Maturity (term)
- How long the borrower has to repay. On a 7(a) loan it is usually 10 years for a business purchase, working capital or equipment, and up to 25 years for real estate.The SBA rule →
- Maximum interest rate
- The highest rate an SBA lender may charge: Prime plus a spread that depends on the loan size.The SBA rule →
N
- NAICS code
- The six-digit code that classifies a business's industry. It sets which SBA size standard applies, and it is how SBA loan data is grouped by industry.SBA loans by industry →
- Non-compete
- The seller's agreement not to start or join a competing business for a set time and area after the sale.The SBA rule →
P
- Personal guarantee
- An owner's promise to repay the loan personally if the business does not.The SBA rule →
- Preferred Lender (PLP)
- A lender the SBA lets approve 7(a) loans in house, without sending each one to the SBA for review. It usually means a faster approval.
- Prepayment penalty
- A fee for paying a loan off early. On a 7(a) loan it only applies to longer terms, and only in the first few years.The SBA rule →
- Prime rate
- The benchmark rate most SBA loans are priced from, as published in the Wall Street Journal. A variable SBA loan moves when Prime moves.The SBA rule →
- Purchase agreement
- The binding contract to buy a business: an asset purchase agreement (APA) or a stock purchase agreement (SPA). Drafted by attorneys after the letter of intent.
Q
- Quality of earnings (QoE)
- An accounting review that tests whether a business's reported earnings are real and repeatable. More common on larger acquisitions.The SBA rule →
S
- SBA Express
- A faster version of the 7(a) loan for smaller amounts, where the lender decides with less SBA paperwork in exchange for a smaller guarantee.The SBA rule →
- Seller note
- Part of the purchase price the seller lends to the buyer, repaid over time.The SBA rule →
- Seller's discretionary earnings (SDE)
- A small business's profit with the owner's pay and add-backs put back in. What one full-time owner can expect to earn, and the usual basis for pricing smaller businesses.
- Size standard
- The SBA's limit, by industry, on how large a business can be (by revenue or employees) and still count as small.
- SOP
- The SBA's Standard Operating Procedure, the rulebook lenders follow for 7(a) and 504 loans. The current version is SOP 50 10 8.SBA rules, answered →
- Spread
- The amount added to Prime to set a loan's rate. Prime of 7.00% plus a 2.75% spread is a 9.75% rate.The SBA rule →
- Stock purchase
- Buying the shares of the company itself, so the buyer takes the entity with its contracts, history and liabilities.The SBA rule →
- Subordination
- Agreeing that one debt gets paid only after another, for example a seller note behind the SBA loan.
T
- Tax transcripts
- IRS records of the tax returns a business or person filed. Lenders order them to confirm the returns they were given match what the IRS has.The SBA rule →
- Transition period
- The time a seller stays on after closing to hand the business over to the buyer.The SBA rule →
U
- UCC filing
- A public notice that a lender has a lien on a business's assets, filed with the state.
W
- Working capital
- Money to run the business day to day: payroll, inventory, rent. An acquisition loan often includes some to get the new owner through the first months.
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