Loan Terms in Plain English: What Lenders Say and What They Actually Mean

APR stands for Annual Percentage Rate. It expresses the total cost of borrowing as a percentage of the loan amount, calculated on an annual basis.

The reason APR matters is that it puts every type of loan on the same scale. A business term loan, an MCA, a line of credit, and an equipment lease all quote their cost in different ways. APR converts them all into one comparable number.

Example: Lender A offers a $50,000 loan at 18% APR over 3 years. Lender B offers a $50,000 MCA with a 1.4 factor rate, estimated to be paid off in 8 months. To compare these, you need to convert the factor rate to APR. At an 8-month payoff, a 1.4 factor rate is roughly 82% APR. Lender A is dramatically cheaper even though the factor rate number sounds smaller than 18.

Whenever you get a loan offer, ask for the APR. If the lender does not provide it, that is a signal to be cautious.

Cents on dollar is an alternative way to express how much an MCA costs. Instead of a factor rate like 1.35, the lender says you are paying 35 cents for every dollar you borrow.

Example: you borrow $20,000 at 30 cents on the dollar. You pay back $20,000 plus 30% of $20,000, which equals $6,000 extra, for a total of $26,000.

This is exactly the same calculation as a 1.30 factor rate expressed differently. Some lenders use cents on dollar because it sounds more concrete to borrowers who are unfamiliar with factor rates. When you see this term, just add 1.0 to the cents on dollar number to get the equivalent factor rate. 30 cents on the dollar equals a 1.30 factor rate.

The Loan Translator lets you enter either format and converts both to APR automatically.

Collateral is an asset you pledge to the lender that they can claim if you default on the loan. It reduces the lender's risk, which typically lowers your rate and improves your approval odds.

Common forms of collateral for business loans include commercial real estate, equipment, inventory, accounts receivable, and personal assets such as a home.

When a lender says a loan is "secured," it means collateral is required. "Unsecured" means no collateral is needed, though these loans typically carry higher rates because the lender has no asset to recover if things go wrong.

For SBA loans, lenders are required to take available collateral up to the loan amount. If you have business or personal assets, expect them to be included in the collateral package. The absence of collateral does not disqualify you, but you will need to be strong on the other eligibility factors to compensate.

Your debt service coverage ratio, or DSCR, compares your net operating income to your total annual debt payments. Lenders use it to determine whether your business generates enough cash to cover both existing debt and the new loan payment.

The formula is: DSCR equals net operating income divided by total annual debt service.

Example: your business has a net operating income of $150,000 per year. Your current debt payments total $80,000 per year. Adding the proposed new loan would bring annual debt payments to $110,000. Your DSCR would be 150,000 divided by 110,000, which equals 1.36.

A DSCR above 1.25 is what SBA lenders typically require as a minimum. A DSCR of 1.0 means your income exactly covers your debt. Below 1.0 means your debt payments exceed your income, which is an automatic denial.

The Loan Translator uses your DSCR to show you whether each loan option is affordable at your current revenue level.

A factor rate is the pricing method used by merchant cash advance companies. Instead of charging interest on your remaining balance, they multiply your advance by a fixed number to determine the total you will pay back.

Example: you borrow $20,000 at a 1.3 factor rate. Total payback is $26,000. You will pay $6,000 above what you received, no matter how long it takes.

The issue is that this number does not tell you how expensive the loan is per year. Whether you pay off that $26,000 in 3 months or 18 months changes the APR dramatically. A 3-month payoff at a 1.3 factor rate is over 120% APR. An 18-month payoff at the same factor rate is closer to 25% APR.

Factor rates typically range from 1.1 on the low end to 1.5 or higher. When you receive an MCA offer, the first question to ask is: at my current daily revenue and the proposed holdback rate, how long will this take to pay off? That answer converts the factor rate into something you can actually evaluate.

If you take an MCA, the lender collects repayment by taking a fixed percentage of your daily card transactions or bank deposits. That percentage is called the holdback rate or retrieval rate.

Example: your business deposits an average of $3,000 per day. Your holdback rate is 15%. The MCA company takes $450 per day until the full payback amount is collected.

A higher holdback rate means you pay off the advance faster but have less cash available each day. A lower holdback rate extends the payoff timeline, which makes the cost look lower daily but means the lender is in your cash flow longer.

The holdback rate directly affects the payoff timeline, which directly affects the true APR cost of the advance.

An origination fee is a one-time charge the lender takes at closing to cover processing costs. It is typically expressed as a percentage of the loan amount and deducted from what you receive.

Example: you are approved for a $100,000 SBA loan with a 2% origination fee. You receive $98,000 in your account. You still repay $100,000 plus interest.

Origination fees on SBA loans are regulated and capped based on loan size. On conventional and alternative loans, they vary widely from 0% to 5% or higher.

When comparing two loan offers, always factor in the origination fee. A loan with a slightly higher interest rate but no origination fee can be cheaper in total than a lower-rate loan with a 3% origination fee, depending on your repayment timeline.

Some loans charge a fee if you pay off the balance before the scheduled end date. This is called a prepayment penalty.

Lenders include prepayment penalties because they earn revenue from the interest you pay over time. If you pay off a 5-year loan in year 2, they lose three years of interest income. The penalty compensates for that loss.

Example: you have a $200,000 loan with a 3-year prepayment penalty equal to 2% of the outstanding balance. If you pay it off in year 1, you owe 2% of the remaining balance as an additional fee.

SBA 7(a) loans have prepayment penalties only on loans with maturities of 15 years or longer, and only if paid off in the first 3 years. Shorter-term business loans typically do not have prepayment penalties, but always confirm before signing.

When you lease equipment through a financing company, the lease agreement often includes a residual value, which is the price you can pay at the end of the lease term to own the equipment outright.

Example: you lease a $80,000 piece of equipment over 5 years. The residual value is set at $10,000. At the end of 5 years, you have paid monthly lease payments totaling $70,000, and you can now purchase the equipment for $10,000, bringing your total cost to $80,000.

A lower residual value means higher monthly payments during the lease because you are paying off more of the equipment cost up front. A higher residual value means lower monthly payments but a larger lump sum at the end if you want to keep the equipment.

The Loan Translator's asset financing calculator includes residual value as an input so you can see how it affects your total cost and monthly payment.

Return on investment, or ROI, in the context of a business loan is the question of whether the revenue you generate with the borrowed capital exceeds the cost of borrowing it.

Example: you borrow $30,000 to buy equipment that allows you to take on $5,000 more in revenue per month. Your monthly loan payment is $900. Your net gain after the payment is $4,100 per month. The loan is paying for itself with room to spare.

Contrast that with borrowing $30,000 for operating expenses when your revenue is flat. The same $900 monthly payment now comes entirely out of existing cash flow with no additional revenue to offset it.

Before taking any loan, running a simple ROI check tells you whether the borrowing decision is a growth tool or a cash flow drain. The Loan Translator includes an ROI calculator that shows your projected net profit after loan payments based on your expected revenue growth.

A stress test models what happens to your ability to repay a loan if your business revenue falls below its current level. It answers the question: if things get harder, can I still cover my payments?

Example: you are considering a loan with a $2,500 monthly payment. Your current revenue is $18,000 per month and your other expenses total $14,000, leaving $4,000 to cover debt. A stress test at a 20% revenue drop would show you operating at $14,400 in revenue, with the same $14,000 in expenses, leaving only $400 to cover debt. The $2,500 payment is now unsustainable.

Stress testing is not pessimism. It is the responsible way to evaluate whether a loan payment is comfortable at your current revenue or just barely manageable, and what a seasonal slowdown or a slow month would do to your position.

The Loan Translator runs a stress test automatically at 10%, 20%, 30%, and 40% revenue drops and shows you whether your debt coverage stays healthy, becomes a caution, or becomes a risk at each level.

Total cost of capital is the full dollar amount you pay above what you borrowed, over the entire life of the loan. It is the simplest way to understand what a loan actually costs.

Example: you borrow $50,000. Over the loan term, you make payments that add up to $63,000. Your total cost of capital is $13,000. That is what the loan cost you in real money.

APR tells you the annual rate. Total cost of capital tells you the total bill. Both matter, but they answer different questions. A short-term loan at a high APR might have a lower total cost of capital than a long-term loan at a lower APR, simply because you pay it off faster and accumulate less interest overall.

When the Loan Translator compares two loans side by side, total cost of capital is one of the key numbers it shows so you can see the full dollar difference between the two options.

Total repayment is the complete amount you will pay back over the life of a loan, including the original amount borrowed plus all interest, fees, and charges.

Example: you borrow $40,000. Over 3 years, your monthly payments of $1,400 add up to $50,400 total. Your total repayment is $50,400. The extra $10,400 beyond what you borrowed is the total cost of capital.

Total repayment is useful when you want to see the full financial commitment of a loan in a single number. It is especially useful when comparing a short-term expensive loan against a long-term cheaper loan, because the total repayment number sometimes surprises people: a 5-year loan at a low rate can cost more in total dollars than a 2-year loan at a higher rate.

The Loan Translator displays total repayment for both loan options side by side so you can compare the full commitment, not just the monthly payment or the rate.