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Accrued Interest- Interest earned or incurred, but not yet paid.

Adjustable Rate Mortgage/ARM Loans- Loans with interest rates that are adjusted periodically based on changes in a pre-selected index.

Amortization- Pay down of a mortgage or loan over a fixed period of time.  Also, the diminution of intangible assets over time.

Appraisal Surplus- The excess of the appraised fair market value of a property over the cost of a property.

Assets- Individual or corporate owned items of economic value.

Balance Sheet- A summary of the asset, liability and equity accounts of a business intended to provide an overview of the financial condition of a business at a given point in time.  The asset side of the balance sheet always equals the sum of liabilities and equity.

Balloon- A provision in a note or loan requiring a partial or full repayment of the note or loan at a specified date(s).

Bridge Loan- A short-term loan, typically 1-60 months in length, usually made in anticipation of being replaced by intermediate or long-term financing.

Call- A provision in a loan or note that gives its holder the right (but not the obligation) to demand repayment of the loan or note on or before the expiration date of the contract.

Cash Flow- The flow of cash through a business.  Typically, cash flows into a business in the form of revenue and out of a business in the form of expenses.  Cash also flows into a business through the acquisition of debt or equity or the sale of assets and flows out of a business to reduce liabilities or acquire assets.

Capital- Cash or goods used to generate income.

Cash Flow Analysis- An analysis of the cash inflows and outflows of a business.  Cash flow analysis is used by a lender to evaluate the ability of a business to repay obligations.

Collateral- Is generally defined as an asset used to provide security for a lender’s loan.

Commercial Real Estate- Real estate used in the operation of a business.  Commercial real estate can be leased or owned and may include a wide variety of property types, such as office buildings, retail space, and industrial facilities.

Common Sizing- This is an analysis tool used to compare the different line items of the balance sheet and profit and loss statements. Common sizing of the balance sheet is accomplished by dividing individual line items by total assets to express each balance sheet account as a percentage of total assets.  Common sizing of the profit and loss statement is accomplished by dividing individual line items by net sales to express each line of the profit and loss statement as a percentage of net sales.  In this manner, individual line items can be more readily compared to each other and fluctuations in line items can be more readily identified over multiple periods.

Corporate Guarantee- A guarantee for repayment of a business’ debt made by another company or business which is not the debtor.

Credit/Financial Analysis- Analysis of a business and/or business principal’s credit/debt repayment history in conjunction with an analysis of a business’ overall financial performance.  This analysis is utilized to evaluate a business’ financial history and overall financial strength.

Creditors- List of suppliers and/or lenders to whom a business owes money.

Current Assets- Active asset accounts that may include cash on hand, readily available cash held in a depository account, money owed to a business by its customers, raw materials or finished goods inventory, or stocks or bonds held as short-term investments. 

Current Liabilities- Active liability accounts that may include bank overdrafts, short-term loans (less than one year), and amounts owed by a business to its suppliers.

Current Ratio- An indication of the business’ ability to fund current liabilities with current assets. The ratio is defined as: Current Assets/ Current Liabilities.  The higher the ratio, the greater the business’ ability to fund current liabilities with current assets.

Days Accounts Receivable- Provides an estimate of how long it takes the business to convert a sale to cash. Normally, this ratio is also cross-referenced with an Aging of Accounts Receivable. This ratio is defined as: 365 x Net Trade Receivables/Net Sales.  The lower the number, the fewer days it takes to convert a sale into cash.

Days Inventory Turnover- Provides an estimate of how long inventory is held by the business before it is sold. The ratio is defined as: 365 x Inventory/Cost of Sales.  The lower the number, the fewer days it takes the business to turn its inventory.

Debtors- List of customers or other parties who owe a business money.

Debt Service Coverage- Provides an estimate of a business’ ability to cover debt obligations with free cash flow.  This ratio is defined as:  Cash Flow Available to Service Debt/Debt Service.  The higher the number, the greater the business’ ability to make debt payments from cash flow.

Debt to Tangible Worth- Compares the capital contributed by creditors to the tangible capital contributed by owners and generated by a business through operations (tangible worth).  Tangible worth is defined as net worth less intangibles assets (e.g., patents, trademarks, organizational costs, etc.).  The ratio is defined as: Total Liabilities/Tangible Net Worth.  The higher the ratio, the more leveraged the business and the greater the risk assumed by creditors.

Debt to Worth- Compares the capital contributed by creditors to capital contributed by owners and generated by a business through operations (worth). The ratio is defined as: Total Liabilities/ Net Worth.  The higher the ratio, the more leveraged the business and the greater the risk assumed by creditors.

Down Payment- The portion of a property’s purchase price paid for in cash or other consideration by its buyer.  A shortfall between the purchase price and down payment amount is an amount that needs to be financed.

Due Diligence Period- Process period in which details of a potential project or investment are examined in order to make a determination to proceed or not to proceed with the transaction.

EBITDA- Earnings before interest, tax, depreciation, and amortization.

Equity- The value of a business to its owner, defined as assets less liabilities.  Also, the value of an asset reduced by the debt associated with it.

FHLB- Acronym for the Federal Home Loan Bank of Seattle.

Fixed Rate- An interest rate option on a loan where the rate paid by the borrower does not change for a specified period of time.

Floating Rate- An interest rate option on a loan where the rate paid by the borrower fluctuates up or down at specified intervals based on a market-driven rate index.

Hard Money Lenders- Provide short-term financing, typically secured by real property, with limited or expedited due diligence but at increased interest rates, points, and fees and at a low loan to value.

Index Rate- Published, market-driven interest rate used by lenders as the basis for determining interest rate charges.

Intangible Asset- Something of value that is unable to be physically touched, e.g. patent, franchise, or trademark.

Interest Expense- Interest expense is the cost of borrowing money for a business or individual.  It is typically expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption.

Interest Rate Cap- Loan feature which limits the amount the interest rate can rise on a variable rate loan in any given adjustment interval and/or over the life of the loan.

Inventory Turnover- Provides an estimate of how many times inventory is turned over by a business during a typical operating cycle. The ratio is defined as: Cost of Sales/Inventory. The higher the number, the greater the number of times inventory is turned over by a business.

Leverage Ratios- Provide an indication of the amount of financial leverage utilized by a business.

LIBOR (London Interbank Offered Rate)- Is the rate of interest at which banks borrow funds from other banks in the London interbank market.  These rates, which are set for different borrowing intervals, are commonly used by other banks and financial institutions as a basis to establish their interest rate charges.

Line of Credit- An agreement by a lender to extend credit to a specified borrower up to a certain maximum dollar amount for a specified period of time.

Loan to Value- Ratio of a loan amount to the fair market value of the collateral for the loan.  This measure is typically expressed as a percentage.

Long-Term Asset- An asset expected to be useable for one or more year.  Long-term assets may include items such as property, equipment and other capital assets.

Long-Term Liability- A liability which is due in one or more year.  Long-term liabilities may include items such as capital leases, bonds payable, and notes payable.

Mortgage- Legal document that pledges title to property as security for the repayment of a loan.

Mortgage Note Payable- A promissory note secured by a mortgage on property.

Origination Fee- A fee charged by a lender to cover the up-front administrative costs of processing a loan.

Owner-Occupied Real Estate- Real Estate which is occupied by its owner.

Permanent Financing- Financing which is not intended to be replaced in the immediate or near future.

Personal Guarantee- A guarantee for repayment of a business’ debt made by an individual, typically an owner or key management member of a business.

Prepayment Penalty- A fee charged by a lender for the repayment of a loan prior to its contractual due date.

Quick Ratio- An indication of a business’ ability to fund current liabilities with the most liquid current assets.  The ratio is defined as: Cash & Equivalents + Net Trade Receivables/Current Liabilities.  If the ratio is substantially less than current ratio, then a business has a dependency on non-liquid current assets, such as inventory, to fund current liabilities.

Refinance- The process of replacing a loan with proceeds from another loan.

Restructure Debt- In the context of commercial financing, the process of reorganizing one or more debts or liabilities in order to facilitate the accomplishment of a desired business objective.

Return on Assets- Identifies a business’ return in relation to its total asset size.  This measure is usually expressed as a percent.  The ratio is defined as: Profit before Taxes/Total Assets.  The higher the figure, the higher the return generated by a business’ management from its use of business assets.

Return on Equity- Identifies a business’ return in relation to its equity capital. This measure is usually expressed as a percent.  The ratio is defined as: Profit before Taxes/Net Worth.  The higher the figure, the higher the productivity generated by a business’ management in relation to the business’ equity capital.  However, a high return on equity may also be representative of the use of high leverage by a business.

Return on Investment- The net profit generated by an investment over a specified period of time relative to the size of the investment.  This measure is usually expressed as a percent.  The ratio is defined as: Net Profit/Average Amount Invested.  The higher the figure, the higher the return relative to the amount invested.

Return on Sales- Identifies a business’ return in relation to its net sales.  This measure is usually expressed as a percent.  The ratio is defined as: Profit before Taxes/Net Sales.  The higher the figure, the higher the proportion of net profit that results from sales.

Sub Prime Lender- A lender that specializes in providing financing for a business or individual that has less than average cash flow or credit.

Tangible Asset- Asset that can by physically touched, e.g. real estate, cash, or equipment.

Traditional Cash Flow- Traditional cash flow is used by a lender to evaluate debt repayment ability and is intended to approximate free cash flow available to be used for debt repayment.  It is typically calculated from a business’ profit and loss statement and is generally calculated as the sum of Earnings before Taxes, plus Interest Expense, plus Depreciation/Amortization Expense, plus other non-cash expense items, plus non-recurring expenses.