Insights
Owner finance glossary
The terms lenders, investors and processors use — in plain English. Reviewed by a Profit Theory financing specialist.
- Amortization
- Paying a loan down with regular payments of principal and interest so it reaches zero by the end of the term.
- Balloon payment
- A large remaining balance due at maturity because the loan's payments were based on a longer schedule than its term.
- Benchmark (index)
- The reference rate a variable loan follows, such as Prime or SOFR. Your rate = benchmark + spread.
- Card-on-file
- A stored, tokenized card a customer has authorized you to charge for future balances or recurring payments.
- Cap and floor
- The maximum and minimum rates a variable loan can reach, if the note includes them.
- Covenant
- A promise in a loan agreement — such as keeping DSCR above a level or limiting other borrowing.
- Days sales outstanding (DSO)
- Average days it takes to collect after a charge. A/R balance ÷ average daily charges.
- Debt service
- Total required loan payments (principal and interest) over a period, usually a year.
- DSCR
- Debt service coverage ratio: annual cash flow available for debt ÷ annual debt service. 1.25x means $1.25 of cash flow per $1.00 of payments.
- Debt-to-EBITDA
- Total debt ÷ annual EBITDA — a common measure of leverage.
- Dilution
- The reduction in an owner's percentage when new shares are issued to an investor.
- EBITDA
- Earnings before interest, taxes, depreciation and amortization — a starting point for cash flow, not the same as cash available for debt.
- Effective rate
- Total processing fees ÷ total card volume for a period. The best single number for comparing processing costs.
- Federal funds rate
- The overnight rate banks charge each other, targeted as a range by the Federal Reserve's FOMC.
- Goodwill
- The part of a business purchase price above the value of its tangible assets — reputation, patient or customer base and earnings power.
- Interchange
- The fee paid to the card-issuing bank on each card sale, set by the card networks.
- Interchange-plus
- Pricing that passes interchange and network fees through at cost and adds a disclosed processor markup.
- Interest coverage
- EBIT ÷ annual interest expense. Shows how comfortably operating profit covers interest.
- Personal guarantee
- An owner's promise to repay a business loan personally if the business can't.
- Pre-money valuation
- The agreed value of a business before new investment. Investor % = investment ÷ (pre-money + investment).
- Prime rate
- The base rate banks post for many business loans, published by the Federal Reserve in its H.15 release.
- Reconciliation
- Matching practice or sales records, processor settlements and bank deposits so every payment is accounted for.
- Reset (repricing)
- The date a variable loan's rate is recalculated from its benchmark.
- Seller note
- Part of a purchase price the seller agrees to receive over time, effectively lending to the buyer.
- Sources and uses
- A table showing every dollar a deal needs (uses) and where each dollar comes from (sources).
- Spread
- The fixed margin a lender adds to the benchmark on a variable loan.
- Surcharging
- Adding a fee to credit card payments. Governed by card-network rules and state laws; generally not allowed on debit cards.
Put the terms to work: try the calculators or browse Insights.