Alternative Finance Glossary
142 key terms across the alternative finance landscape—spanning hard money lending, merchant cash advances, asset-based lending, invoice factoring, private credit, business purpose lending, and loan servicing operations.
Showing 142 of 142 terms
General Alternative Finance
- Alternative Lending
- Non-bank financing provided by private lenders, fintech platforms, or specialty finance companies outside the traditional banking system.
- Private Credit
- Privately negotiated loans and debt financing provided to companies by non-bank lenders, typically through dedicated funds or platforms.
AI for Private Credit → - Direct Lending
- A private credit strategy where non-bank lenders originate loans directly to borrowers without intermediaries like investment banks.
- Non-Bank Lender
- A financial institution that provides loans but does not hold a banking charter. Includes private lenders, fintech companies, and specialty finance firms.
- Accredited Investor
- An individual or entity meeting SEC wealth or income thresholds (e.g., $1M+ net worth or $200K+ annual income) permitted to invest in private placements.
- Alternative Investment
- Any investment outside of traditional stocks, bonds, and cash—including private equity, private credit, real estate funds, and hedge funds.
- Fintech Lender
- A technology-driven financial company that uses software, algorithms, and digital platforms to originate and service loans.
- Capital Stack
- The hierarchy of all funding sources in a deal, ordered by seniority from senior debt at the top to common equity at the bottom.
- Yield
- The income return on an investment, typically expressed as an annual percentage of the investment’s cost or current market value.
- Spread
- The difference between the interest rate a lender charges on a loan and the lender’s cost of funds or a benchmark rate.
- Origination
- The process of creating a new loan, from application through underwriting to funding and disbursement.
- Syndication
- The process of distributing portions of a loan across multiple lenders or investors to spread risk and increase lending capacity.
Hard Money Lending
- Hard Money Loan
- A short-term, asset-based loan secured by real property, typically issued by private investors or companies rather than banks, with approval based on collateral value rather than borrower creditworthiness.
AI for CRE Lenders → - After-Repair Value (ARV)
- The estimated market value of a property after all planned renovations and repairs are completed; used to determine maximum loan amounts on rehab deals.
AI for CRE Lenders → - Loan-to-Value (LTV)
- The ratio of a loan amount to the appraised value of the collateral property, expressed as a percentage (e.g., a $70K loan on a $100K property = 70% LTV).
AI for CRE Lenders → - Loan-to-Cost (LTC)
- The ratio of the loan amount to the total project cost, including purchase price and renovation budget.
AI for CRE Lenders → - Points (Origination Fee)
- Upfront fees charged by the lender at closing, expressed as a percentage of the loan amount (e.g., 2 points = 2% of the loan).
- Fix-and-Flip Loan
- A short-term hard money loan designed for investors purchasing a property, renovating it, and reselling it for profit.
AI for CRE Lenders → - Bridge Loan
- A short-term loan (typically 6–24 months) used to “bridge” the gap between acquiring a new property and securing permanent financing or selling an existing asset.
AI for CRE Lenders → - Interest-Only Payments
- A loan structure where the borrower pays only interest during the loan term, with the full principal due at maturity.
- Balloon Payment
- A large lump-sum payment of the remaining loan balance due at the end of a loan term, common in short-term hard money and bridge loans.
- Draw Schedule
- A predetermined plan for disbursing construction or renovation funds in stages as work milestones are completed and inspected.
AI for CRE Lenders → - Rehab Budget
- The itemized estimate of renovation costs for a fix-and-flip or value-add project, used by lenders to structure draw schedules.
- Exit Strategy
- The borrower’s plan for repaying the loan—typically through property sale, refinancing into permanent debt, or lease-up stabilization.
- Cross-Collateralization
- Using multiple properties as collateral for a single loan, giving the lender a lien on all pledged assets.
- Blanket Loan
- A single mortgage or loan secured by two or more properties simultaneously.
Business Purpose Lending (BPL)
- Business Purpose Loan (BPL)
- A real estate loan made for investment or business purposes (not owner-occupied), often exempt from consumer lending regulations like TILA and RESPA.
AI for CRE Lenders → - DSCR Loan
- A Debt Service Coverage Ratio loan that qualifies borrowers based on the rental income of the investment property rather than personal income or employment.
AI for CRE Lenders → - Debt Service Coverage Ratio (DSCR)
- A metric comparing a property’s net operating income (NOI) to its total debt obligations; a DSCR of 1.25x means income exceeds debt payments by 25%.
AI for CRE Lenders → - Net Operating Income (NOI)
- Gross rental income minus operating expenses (taxes, insurance, maintenance, management), before debt service; the key metric for investment property analysis.
AI for CRE Lenders → - Rental Property Loan
- A long-term loan for purchasing or refinancing income-producing residential (1–4 unit) or commercial rental properties.
- Portfolio Loan
- A loan held on the lender’s own balance sheet rather than sold to the secondary market, offering more flexible underwriting criteria.
- Blanket Lien
- A lien that gives the lender a security interest in all of a borrower’s assets, common in commercial and MCA transactions.
- Non-QM Loan
- A Non-Qualified Mortgage that doesn’t meet the CFPB’s “qualified mortgage” standards but serves borrowers who fall outside conventional lending criteria.
- Ground-Up Construction Loan
- A loan to finance the construction of a new building from scratch, typically disbursed in draws as construction milestones are met.
AI for CRE Lenders → - Value-Add Property
- An investment property with potential to increase value through renovations, improved management, or repositioning.
Merchant Cash Advance (MCA)
- Merchant Cash Advance (MCA)
- An upfront lump sum of capital provided to a business in exchange for a fixed percentage of future credit card or debit card sales; technically a purchase of future receivables rather than a loan.
AI for MCA Lenders → - Factor Rate
- A multiplier (not an interest rate) used to calculate total repayment on an MCA. For example, a factor rate of 1.35 on a $50K advance means $67,500 total owed.
AI for MCA Lenders → - Future Receivables Sale Agreement (FRSA)
- The legal contract in an MCA transaction where the merchant sells a portion of future sales/receivables to the funder in exchange for an advance.
AI for MCA Lenders → - Holdback Percentage
- The fixed percentage of daily credit card or bank deposit revenue withheld to repay an MCA.
AI for MCA Lenders → - ACH (Automated Clearing House)
- An electronic funds transfer system used by MCA funders and lenders to automatically debit daily or weekly repayments from a borrower’s bank account.
AI for MCA Lenders → - Credit Card Split
- An MCA repayment method where a fixed percentage of gross credit card sales is routed directly from the payment processor to the funder.
AI for MCA Lenders → - Daily Remittance
- The amount debited from a merchant’s bank account each business day as repayment toward an MCA or loan.
AI for MCA Lenders → - Stacking
- When a merchant takes multiple MCAs or advances from different funders simultaneously, often without the knowledge of existing funders—considered high-risk.
AI for MCA Lenders → - Confession of Judgment (COJ)
- A legal document signed by the borrower that allows the funder to obtain an automatic court judgment against the borrower in the event of default, bypassing standard litigation.
AI for MCA Lenders → - Buy Rate
- The funder’s bottom-line offer on an MCA deal; the base factor rate before any broker commission is added.
AI for MCA Lenders → - ISO (Independent Sales Organization)
- A third-party sales agent or broker that refers merchants to MCA funders in exchange for a commission on funded deals.
AI for MCA Lenders → - Clawback
- When a funder reclaims a previously paid commission from an ISO or broker, typically when a funded deal defaults within a specified period (e.g., 30 days).
AI for MCA Lenders → - Position (1st, 2nd, 3rd)
- Refers to the priority order of MCA funders when a merchant has multiple advances; 1st position means that funder is repaid first.
AI for MCA Lenders → - Average Daily Balance (ADB)
- The average amount of money in a merchant’s business bank account on a daily basis; a key underwriting metric for MCA funders.
AI for MCA Lenders → - Stipulation (Stip)
- A document or condition required by the funder before an MCA can be approved or funded (e.g., bank statements, tax returns, voided check).
AI for MCA Lenders → - Payoff Amount
- The total remaining balance owed to fully satisfy and close out an existing MCA or loan.
AI for MCA Lenders → - Renewal / Re-Up
- A new MCA offered to a merchant who has partially or fully repaid a previous advance, often at improved terms.
AI for MCA Lenders → - Double Funding
- When two funders unknowingly fund the same merchant on the same day—a form of fraud or stacking.
AI for MCA Lenders →
Asset-Based Lending (ABL)
- Asset-Based Lending (ABL)
- Financing secured by a borrower’s business assets—such as accounts receivable, inventory, equipment, or real estate—with loan amounts based on the liquidation value of the collateral.
AI for Asset-Based Lenders → - Borrowing Base
- The maximum amount a borrower can draw under an ABL facility, calculated by applying advance rates to the value of eligible collateral.
AI for Asset-Based Lenders → - Advance Rate
- The percentage of collateral value that a lender will advance as a loan (e.g., 80% on receivables, 50% on inventory).
AI for Asset-Based Lenders → - Eligible Receivables
- Accounts receivable that meet the lender’s criteria for inclusion in the borrowing base (e.g., less than 90 days old, from creditworthy customers).
AI for Asset-Based Lenders → - Concentration Limit
- A cap on the percentage of the borrowing base that can be attributed to a single customer or debtor, to reduce risk exposure.
AI for Asset-Based Lenders → - Field Exam / Field Audit
- An on-site review of a borrower’s collateral (receivables, inventory, records) conducted by or on behalf of the lender to verify asset values and quality.
AI for Asset-Based Lenders → - Dilution
- The reduction in the collectible value of receivables due to credits, returns, allowances, or disputes; tracked by ABL lenders as a risk metric.
AI for Asset-Based Lenders → - Lockbox
- A controlled bank account where a borrower’s customer payments are deposited directly, giving the lender oversight and control over incoming cash flows.
AI for Asset-Based Lenders → - FILO Tranche (First In, Last Out)
- A subordinated layer within an ABL facility that increases borrowing capacity by lending against less liquid assets; the FILO lender is first to fund but last to be repaid.
AI for Asset-Based Lenders → - Revolving Line of Credit
- A flexible credit facility that allows borrowers to draw, repay, and re-draw funds up to an approved limit based on their borrowing base.
AI for Asset-Based Lenders → - Availability
- The amount of funds a borrower can currently draw under an ABL facility, calculated as the borrowing base minus outstanding draws and reserves.
AI for Asset-Based Lenders → - Collateral Monitoring
- Ongoing tracking and verification of pledged assets by the lender, including periodic reports and field exams, to maintain accurate borrowing base calculations.
AI for Asset-Based Lenders →
Invoice Factoring
- Invoice Factoring
- A financial transaction where a business sells its unpaid invoices (accounts receivable) to a third-party factor at a discount in exchange for immediate cash.
- Factor
- The financial company that purchases a business’s invoices and assumes responsibility for collecting payment from the account debtors.
- Account Debtor
- The customer or business entity that owes payment on an invoice purchased by a factoring company.
- Factoring Fee (Discount Rate)
- The percentage charged by the factor for purchasing invoices, applied to the face value of each invoice.
- Recourse Factoring
- A factoring arrangement where the client must buy back or replace invoices if the account debtor fails to pay within a specified period.
- Non-Recourse Factoring
- A factoring arrangement where the factor assumes the credit risk of non-payment by the account debtor (subject to specific conditions).
- Reserve
- The portion of an invoice’s value withheld by the factor until the account debtor pays; the reserve (minus fees) is released to the client after collection.
- Rebate
- The remaining balance of an invoice, less factoring fees, returned to the client after the factor collects full payment from the account debtor.
- Notification Factoring
- A factoring arrangement where the account debtor is notified that their invoice has been sold to and should be paid directly to the factor.
- Funding Period
- The time between when the factor purchases an invoice and when the account debtor makes payment.
- Aging Report
- A report categorizing accounts receivable by the length of time an invoice has been outstanding (e.g., 0–30, 31–60, 61–90 days).
- Invoice Discounting
- A form of invoice finance where a business borrows against unpaid invoices but retains control of its sales ledger and collections process.
Underwriting & Credit
- Underwriting
- The process of evaluating a borrower’s risk profile—including creditworthiness, collateral, cash flow, and deal structure—to determine loan approval and terms.
- Credit Memo
- A written analysis and recommendation prepared by an underwriter summarizing the loan request, borrower profile, risk assessment, and proposed terms for approval.
- Debt-to-Income Ratio (DTI)
- The percentage of a borrower’s gross monthly income that goes toward paying debts; a key metric in consumer and some commercial underwriting.
- Personal Guarantee (PG)
- A pledge by an individual (typically the business owner) to be personally liable for repayment of a business loan if the business defaults.
- Guarantor
- An individual or entity that agrees to be responsible for repaying a debt if the primary borrower fails to do so.
- Credit Score / FICO
- A numerical rating (typically 300–850) representing a borrower’s creditworthiness, based on credit history, payment behavior, and outstanding debts.
- Appraisal
- A professional assessment of a property’s fair market value, typically required by lenders before approving a real estate loan.
AI for CRE Lenders → - Broker Price Opinion (BPO)
- A less formal (and less expensive) alternative to a full appraisal, where a real estate broker estimates the value of a property.
- Due Diligence
- The comprehensive investigation and verification process conducted by a lender or investor before approving a loan or making an investment.
- Title Search
- An examination of public records to verify legal ownership of a property and identify any existing liens, encumbrances, or claims against it.
- Environmental Assessment (Phase I)
- A study of a commercial property’s environmental history to identify potential contamination or liability before a loan closing.
Loan Servicing & Operations
- Loan Servicing
- The administrative management of a loan from origination to payoff—including payment collection, escrow management, investor reporting, and default management.
- Amortization
- The process of paying off a loan through regular, scheduled installments that cover both principal and interest over time.
- Escrow Account
- A third-party account where funds are held for property taxes, insurance, and other obligations, managed by the loan servicer on behalf of the borrower.
- Delinquency
- The status of a loan when a borrower fails to make a payment by the due date; typically categorized by days past due (30, 60, 90+).
- Default
- A serious breach of loan terms—most commonly failure to make payments—that triggers the lender’s right to pursue remedies including acceleration or foreclosure.
- Charge-Off
- An accounting action where a lender writes off a delinquent loan as a loss on its books, typically after 120–180 days of non-payment.
- Foreclosure
- The legal process by which a lender seizes and sells a property used as collateral to recover an unpaid loan balance.
- Real Estate Owned (REO)
- Property acquired by a lender through foreclosure that remains unsold and sits on the lender’s books.
- Loan Modification
- A restructuring of loan terms—such as interest rate, maturity date, or payment schedule—to help a struggling borrower avoid default.
- Prepayment Penalty
- A fee charged to a borrower for paying off a loan before its scheduled maturity date, designed to protect the lender’s expected yield.
- Payoff Statement
- A document from the lender showing the exact amount required to fully satisfy and close a loan as of a specific date.
- Investor Reporting
- Periodic reports provided to loan investors or participants detailing loan performance, payment status, delinquencies, and portfolio metrics.
AI for Private Credit → - Subservicer
- A third-party company that handles the day-to-day servicing operations on behalf of the loan owner or master servicer.
- Loss Mitigation
- Strategies and processes used by servicers to minimize financial losses when a borrower is unable to make loan payments.
Legal & Compliance
- UCC Filing (UCC-1 Financing Statement)
- A legal form filed with a state agency to establish a lender’s security interest in a borrower’s personal property (assets), creating a public record of the lien.
- Lien
- A legal claim on an asset that serves as collateral for a debt, giving the lienholder the right to seize the asset if the debt is not repaid.
- Subordination Agreement
- A legal agreement where a creditor agrees to rank its claim below another creditor’s claim in terms of priority for repayment.
- Intercreditor Agreement
- A contract between two or more lenders that defines their respective rights, priorities, and remedies with respect to a shared borrower’s collateral.
AI for Private Credit → - Promissory Note
- A legally binding document where the borrower makes an unconditional written promise to repay a specific amount to the lender under agreed terms.
- Deed of Trust
- A legal document that conveys title to a property to a neutral third-party trustee as security for a loan, used in place of a mortgage in some states.
- Mortgage
- A legal instrument that pledges real property as security for a loan, giving the lender the right to foreclose if the borrower defaults.
- Perfected Security Interest
- A lender’s secured claim on collateral that has been properly documented and publicly filed (e.g., via UCC-1), establishing legal priority over other creditors.
- Personal Property Security
- The legal framework governing security interests in movable assets (as opposed to real estate), including equipment, inventory, and receivables.
- Usury Laws
- State regulations that cap the maximum interest rate a lender can charge on a loan; exemptions may apply to commercial or business-purpose loans.
- Truth in Lending Act (TILA)
- A federal law requiring lenders to clearly disclose loan terms, APR, and total costs to consumers; business-purpose loans are generally exempt.
- RESPA (Real Estate Settlement Procedures Act)
- A federal law governing real estate closing procedures and disclosures; generally does not apply to business-purpose or investment property loans.
Private Credit & Structured Finance
- Senior Debt
- The highest-priority debt in the capital stack, with first claim on assets and cash flows in case of default or liquidation.
AI for Private Credit → - Mezzanine Debt
- Subordinated debt that sits between senior debt and equity in the capital stack, often carrying higher interest rates and sometimes including equity warrants.
AI for Private Credit → - Subordinated Debt
- Debt that ranks below senior debt in repayment priority; in default, subordinated lenders are repaid only after senior obligations are satisfied.
AI for Private Credit → - Unitranche Loan
- A single, blended loan facility that combines senior and subordinated debt into one tranche, simplifying the capital structure for the borrower.
AI for Private Credit → - PIK (Payment-in-Kind) Interest
- Interest that is added to the loan’s principal balance rather than paid in cash, effectively deferring current payments and increasing the total amount owed.
AI for Private Credit → - Covenant
- A binding condition in a loan agreement requiring the borrower to meet certain financial benchmarks (financial covenants) or operational requirements (maintenance covenants).
AI for Private Credit → - Covenant-Lite
- A loan structure with fewer or less restrictive covenants, giving the borrower greater operational flexibility—common in private credit deals.
AI for Private Credit → - Warrant
- A right (often attached to mezzanine or venture debt) allowing the lender to purchase equity in the borrower’s company at a set price.
- Distressed Debt
- Debt securities or loans of companies in financial difficulty, bankruptcy, or default, often purchased at a steep discount with potential for recovery upside.
AI for Private Credit → - Special Situations Lending
- Financing strategies targeting atypical or event-driven opportunities—such as restructurings, turnarounds, or litigation-related funding.
AI for Private Credit → - Warehouse Line / Warehouse Facility
- A revolving credit line used by loan originators to fund new loans before they are sold or securitized in the secondary market.
- Loan Participation
- An arrangement where a lead lender sells portions of a loan to other investors, who share in the loan’s risk and return.
- Securitization
- The process of pooling loans or receivables into a single vehicle and issuing asset-backed securities (ABS) to investors, funded by the pool’s cash flows.
- Sponsor-Backed Deal
- A lending transaction arranged through the borrower’s private equity or financial sponsor, who typically provides equity and facilitates the financing.
AI for Private Credit → - Non-Sponsored Deal
- A direct lending transaction originated with company management without the involvement of a private equity sponsor.
Deal Flow & Portfolio Management
- Deal Flow
- The rate at which new lending or investment opportunities are received and reviewed by a lender or fund.
- Pipeline
- The inventory of potential deals at various stages of origination—from lead generation through underwriting to closing.
- Loan Tape
- A standardized dataset containing key attributes of every loan in a portfolio (borrower info, terms, balances, performance status), used for analysis and due diligence.
- Portfolio Servicing
- The ongoing management and administration of a book of loans, including collections, reporting, compliance, and workout activities.
- Funding Velocity
- The speed at which a lender can move deals from application through underwriting to funding—a key competitive differentiator.
- Default Rate
- The percentage of loans in a portfolio that have entered default over a given period.
- Recovery Rate
- The percentage of the outstanding loan balance that a lender recovers after a borrower defaults, through collateral liquidation, workout, or other means.
- Loan-to-Value at Origination
- The LTV ratio calculated when a loan is first funded, used as a baseline for tracking collateral coverage over the life of the loan.
- Weighted Average Coupon (WAC)
- The average interest rate across all loans in a portfolio, weighted by each loan’s outstanding balance.
- Concentration Risk
- The risk of disproportionate exposure to a single borrower, property type, geography, or industry within a loan portfolio.
- Vintage
- The year or period in which a group of loans was originated; used to analyze performance trends across different origination cohorts.
- Workout
- The process of restructuring or resolving a delinquent or defaulted loan through negotiation, modification, or liquidation of collateral.