SBA Loan Terminology Guide
Plain-English definitions for every term you'll encounter during the SBA 7(a) loan process — from DSCR to equity injection to personal guarantee.
Addback
A non-cash or one-time expense that is added back to net income when calculating cash flow. Common addbacks include depreciation, amortization, interest expense, owner's compensation above market rate, and one-time costs. Addbacks increase your calculated cash flow and can significantly improve your DSCR.
Amortization
The process of paying off a loan through regular, scheduled payments over time. Each payment covers both principal and interest. SBA 7(a) loans are fully amortizing — paid in full at maturity with no balloon payment required.
Balance Sheet (Schedule L)
A financial statement showing a company's assets, liabilities, and equity at a point in time. In SBA underwriting, lenders review the balance sheet (often called Schedule L from the business tax return) to assess net worth, working capital, and debt load.
Balloon Payment
A large lump-sum payment due at the end of a loan term that pays off remaining principal. Conventional commercial loans often have 5–7 year balloon payments. SBA 7(a) loans are fully amortizing and have NO balloon payments — a key advantage.
CAPLine
A type of SBA 7(a) revolving line of credit designed for businesses with cyclical or seasonal cash flow needs. CAPLines can be used for working capital, contract financing, or seasonal inventory. Terms up to 10 years, maximum $5,000,000.
Collateral
Assets pledged by the borrower to secure a loan. If the borrower defaults, the lender can seize and sell the collateral. SBA policy requires lenders to take all available collateral, but lack of full collateral coverage alone does not disqualify an otherwise creditworthy borrower.
Credit Score (Personal)
A numerical score (300–850) representing an individual's creditworthiness. SBA 7(a) lenders typically require a minimum personal credit score of 650+, with 680+ preferred for startups. Higher scores generally lead to better terms and higher approval odds.
Debt Schedule
A document listing all existing business debts including lender name, original balance, current balance, monthly payment, maturity date, and collateral pledged. Lenders use the debt schedule to calculate global cash flow and total debt service obligations.
DSCR (Debt Service Coverage Ratio)
The ratio of a business's net operating income to its total debt service. Calculated as: DSCR = Annual Cash Flow ÷ Annual Debt Payments. The SBA requires a minimum DSCR of 1.15x — meaning $1.15 in income for every $1.00 of debt payments. A DSCR above 1.25x is considered strong.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow that removes non-cash charges and financing costs to show core business profitability. SBA lenders often start with EBITDA and adjust for owner compensation and existing debt service.
Equity Injection
The borrower's personal cash contribution to a project or business acquisition. For startups, most SBA lenders require 20–30% equity injection. Acceptable sources include personal savings, ROBS, gift funds, home equity, and seller financing.
Global Cash Flow
An analysis combining cash flows from all entities (personal and business) in which the borrower has an ownership interest. SBA lenders run global cash flow to ensure total income from all sources supports total debt service across all obligations.
Guarantee Fee (SBA)
A one-time upfront fee charged by the SBA on the guaranteed portion of the loan. Rates range from 0% for loans ≤$150K to 3.5% for loans over $700K. This fee can be financed into the loan amount.
Interim Financials
Financial statements (P&L and balance sheet) prepared for a period less than a full year, typically year-to-date. SBA lenders require interim financials dated within 90–180 days of application to understand the business's current performance.
Lien
A legal claim against an asset that secures repayment of a debt. SBA lenders file UCC-1 financing statements on business assets. All existing liens on collateral must be disclosed as they affect lender security position.
Net Operating Income (NOI)
Revenue minus operating expenses (excluding interest, taxes, depreciation, and amortization). In commercial real estate, NOI = gross rental income minus vacancy and operating expenses. Used with owner compensation to calculate DSCR.
Officer Compensation
Salaries, bonuses, and compensation paid to business owners who are officers. In SBA underwriting, compensation is scrutinized because owners may pay above or below market wages. Lenders normalize compensation to market rate when calculating cash flow.
Owner-Occupancy
The SBA requirement that the borrowing business physically occupy the property being financed. For existing buildings: ≥51% of usable square footage. For new construction: ≥60% occupancy required. Investment properties do not qualify.
Personal Financial Statement (PFS)
SBA Form 413, listing the personal assets, liabilities, and net worth of each owner with 20%+ ownership. Required for all SBA 7(a) loans. Lenders review it to assess global net worth, personal liquidity, and additional collateral.
Personal Guarantee
A pledge by an individual to personally repay a business loan if the business defaults. The SBA requires personal guarantees from all owners with 20%+ ownership. A personal guarantee puts personal assets at risk if the loan defaults.
Pre-Qualification vs. Pre-Approval
Pre-qualification is an informal assessment based on information you provide that estimates whether you may qualify. Pre-approval is a more formal lender commitment after reviewing verified documents and credit. AI Loan Advisors provides pre-qualification analysis.
Prime Rate
The benchmark interest rate set by major U.S. banks, tied to the Federal Reserve's federal funds rate. SBA 7(a) loan rates are variable and expressed as 'Prime + X%.' When the Fed raises rates, SBA loan rates increase.
ROBS (Rollover for Business Startups)
A legal structure allowing entrepreneurs to use retirement funds (401k or IRA) to fund a new business without early withdrawal taxes or penalties. Requires a C-Corporation that sponsors a qualified retirement plan. Often used for SBA startup loan equity injection.
SBA 7(a) Loan Program
The most popular small business loan program backed by the U.S. Small Business Administration. Loans are made by SBA-approved lenders with the SBA guaranteeing 75–85% of the loan. Maximum loan: $5,000,000. Eligible for real estate, equipment, working capital, and business acquisition.
SBA Express Loan
An SBA 7(a) program with a maximum of $500,000 and a 36-hour SBA turnaround. Uses a streamlined process with delegated lender authority. Trade-off: higher interest rates (Prime + 4.5%–6.5%) and a lower 50% SBA guarantee.
SBA Guarantee
The percentage of an SBA 7(a) loan the SBA will repay the lender if the borrower defaults. Standard loans: 75% guarantee over $150K, 85% on ≤$150K. The guarantee protects the lender, not the borrower — the borrower is still fully liable.
SBA Size Standards
Industry-specific criteria determining whether a business qualifies as "small" under SBA rules, based on annual revenue or employee count. Most businesses with under $10M revenue or fewer than 500 employees will qualify, but thresholds vary by NAICS code.
Sources and Uses Statement
A document showing where project funds come from (sources: SBA loan, equity injection, seller financing) and where they go (uses: purchase price, equipment, working capital, closing costs). Required for every SBA loan application.
Tax Returns (Business)
Annual federal income tax returns filed by the business: Form 1120 (C-Corp), 1120-S (S-Corp), or 1065 (Partnership). SBA lenders require 2–3 years of returns to calculate historical cash flow and verify revenue. Tax returns carry more weight than financial statements because they are filed under penalty of perjury.
UCC-1 Financing Statement
A legal document filed by a lender to publicly declare a security interest in a borrower's personal property (equipment, inventory, receivables). Establishes lender priority. SBA lenders routinely file UCC-1 statements as part of loan closing.
Working Capital
The difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt). Positive working capital means a business can meet near-term obligations. SBA 7(a) loans can provide working capital as a term loan or revolving line of credit.
Ready to Apply What You've Learned?
Now that you speak the language, let our AI analyze your financials and give you a lender-ready pre-qualification report.