Reference
Commercial Lending Glossary
Key terms and definitions for commercial loan underwriting and financial analysis.
A
Amortization Schedule
A table showing each periodic payment on a loan broken down into principal and interest components over the life of the loan. In commercial lending, amortization schedules help borrowers and lenders understand how the loan balance decreases over time and are critical for calculating debt service obligations used in DSCR analysis.
B
Balloon Payment
A large lump-sum payment due at the end of a loan term when the amortization period exceeds the loan maturity. Common in commercial real estate lending where a loan may amortize over 25 years but mature in 5–10 years, requiring refinancing or payoff of the remaining balance at maturity.
C
C&I Loan (Commercial & Industrial)
A loan made to a business for working capital, equipment, expansion, or other operational purposes — as opposed to real estate–secured lending. C&I loans are typically underwritten based on the borrower's cash flow, balance sheet strength, and industry position rather than collateral value alone.
Cap Rate (Capitalization Rate)
The ratio of a property's net operating income (NOI) to its current market value or purchase price. Cap rate is a key metric in CRE underwriting used to evaluate investment returns and compare properties. A lower cap rate generally indicates lower risk and higher property values.
Concentration Risk
The risk arising from excessive exposure to a single borrower, industry, geography, or loan type within a lending portfolio. Regulators closely monitor concentration risk — for example, a community bank with CRE loans exceeding 300% of total capital triggers enhanced supervisory scrutiny under interagency guidance.
Covenant (Loan Covenant)
A condition or requirement written into a loan agreement that the borrower must comply with during the life of the loan. Affirmative covenants require actions (e.g., maintaining insurance, delivering financial statements). Negative covenants restrict actions (e.g., limits on additional debt or asset sales). Covenant violations can trigger default provisions.
CRE (Commercial Real Estate)
Real property used for business purposes, including office buildings, retail centers, industrial facilities, multifamily housing (5+ units), and hospitality properties. CRE lending involves specialized underwriting focused on property cash flow, occupancy, lease terms, and market conditions in addition to borrower creditworthiness.
Credit Memo
A formal written analysis prepared by a loan officer or credit analyst that summarizes a borrower's creditworthiness, the proposed loan structure, risk factors, mitigants, and a recommendation to approve or decline. Credit memos typically include financial spreading results, DSCR calculations, collateral analysis, and policy exception documentation.
Current Ratio
A liquidity metric calculated as current assets divided by current liabilities. It measures a borrower's ability to pay short-term obligations with short-term assets. A current ratio above 1.0 indicates the business has more current assets than current liabilities, though acceptable thresholds vary by industry.
D
DSCR (Debt Service Coverage Ratio)
The ratio of net operating income (or available cash flow) to total annual debt service, including principal and interest payments. DSCR is the single most important metric in commercial underwriting — a DSCR of 1.25x means the borrower generates 25% more income than needed to cover debt payments. Most lenders require a minimum DSCR between 1.20x and 1.35x.
Debt Yield
The ratio of a property's net operating income to the total loan amount, expressed as a percentage. Debt yield provides a leverage-neutral measure of loan risk that is independent of interest rate or amortization. A higher debt yield indicates lower risk. Many CMBS and institutional lenders use a 10% minimum debt yield threshold.
Debt-to-Equity Ratio
A leverage metric calculated as total liabilities divided by total equity (or net worth). It measures how much of a business is financed by debt versus owner investment. Higher ratios indicate greater financial leverage and risk. In commercial lending, this ratio helps assess whether a borrower has adequate skin in the game.
F
Financial Spreading
The process of extracting financial data from tax returns, financial statements, and other documents and organizing it into a standardized format for analysis. Spreading enables consistent comparison across borrowers, time periods, and loan types. Historically done manually in spreadsheets, automated spreading tools now extract and normalize data in minutes.
Fixed Charge Coverage Ratio (FCCR)
A broader coverage metric than DSCR that includes all fixed obligations — not just debt service but also lease payments, insurance, taxes, and other recurring costs. FCCR is calculated as (EBITDA + fixed charges) divided by (fixed charges + debt service). SBA lenders commonly use FCCR with a 1.15x minimum for 7(a) loans.
G
Global Cash Flow Analysis
An underwriting approach that consolidates the cash flows of all related entities and guarantors — not just the borrowing entity — to assess total repayment capacity. Global cash flow analysis is standard practice for small business and owner-operated commercial loans where personal and business finances are intertwined.
L
Loan Origination System (LOS)
Software used by lenders to manage the end-to-end loan process from application through closing and booking. An LOS typically handles workflow management, document tracking, compliance checks, and integration with core banking systems. Aloan integrates with existing LOS platforms to automate the underwriting layer.
Loan-to-Cost (LTC) Ratio
The ratio of the loan amount to the total project cost, commonly used in construction and development lending. LTC accounts for land acquisition, hard costs, soft costs, and contingencies. Most construction lenders cap LTC at 75–80%, requiring the developer to contribute 20–25% equity.
LTV (Loan-to-Value Ratio)
The ratio of the loan amount to the appraised value of the collateral property. LTV is a primary measure of loan risk in real estate lending — a 75% LTV means the borrower has 25% equity. Regulatory guidelines and credit policy typically set maximum LTV thresholds by property type (e.g., 80% for owner-occupied CRE, 75% for investment properties).
M
MRA (Matter Requiring Attention)
A finding issued by bank examiners during a regulatory examination that identifies a deficiency requiring corrective action. MRAs related to credit administration often cite inadequate financial spreading, incomplete credit memos, missing covenant monitoring, or insufficient collateral documentation. Unresolved MRAs can escalate to MRIAs (Matters Requiring Immediate Attention).
N
NOI (Net Operating Income)
Total property revenue minus operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes. NOI is the foundational metric for CRE underwriting and feeds directly into DSCR, cap rate, and debt yield calculations. Accurate NOI calculation requires careful treatment of vacancy, management fees, and reserves.
P
Participation Loan
A loan arrangement where multiple lenders share in funding a single credit, typically with a lead bank originating and servicing the loan while selling portions to participating institutions. Participations allow smaller community banks and credit unions to diversify their portfolios and participate in larger deals that would exceed their individual lending limits.
Personal Financial Statement (PFS)
A document detailing an individual guarantor's assets, liabilities, income, and net worth. Required for virtually all commercial loans with personal guarantees, the PFS helps lenders evaluate guarantor liquidity, contingent liabilities, and overall financial strength as a secondary repayment source.
Q
Quick Ratio
A stricter liquidity measure than the current ratio, calculated as (cash + marketable securities + accounts receivable) divided by current liabilities. The quick ratio excludes inventory and prepaid expenses, providing a more conservative view of a borrower's ability to meet short-term obligations without relying on inventory liquidation.
R
Rent Roll
A detailed schedule of all tenants in an income-producing property, listing tenant names, unit numbers, lease start and end dates, monthly rent amounts, security deposits, and any concessions. The rent roll is cross-referenced against the operating statement during underwriting to validate income and assess lease rollover risk.
S
SBA Loan (Small Business Administration)
A loan partially guaranteed by the U.S. Small Business Administration, reducing lender risk and enabling access to capital for small businesses that might not qualify for conventional financing. The most common programs are SBA 7(a) for general business purposes and SBA 504 for real estate and equipment. SBA loans have specific underwriting requirements including global cash flow analysis and FCCR minimums.
Stress Testing
The process of evaluating a loan's performance under adverse scenarios such as rising interest rates, declining revenues, increased vacancy, or economic recession. Stress testing helps lenders understand downside risk and determine whether a borrower can maintain adequate debt service coverage even in unfavorable conditions.
T
T-12 (Trailing Twelve Months Operating Statement)
A financial statement showing a property's actual income and expenses over the most recent twelve-month period. The T-12 provides a current snapshot of property performance and is preferred over annual statements in CRE underwriting because it captures the most recent operating trends, occupancy changes, and expense patterns.
U
UCC Filing (Uniform Commercial Code)
A legal filing that establishes a lender's security interest in a borrower's personal property (equipment, inventory, accounts receivable, etc.). UCC-1 financing statements are filed with the state and serve as public notice of the lien. During underwriting, UCC searches reveal existing liens that could affect collateral priority and repayment risk.
W
Weighted Average Lease Term (WALT)
The average remaining lease term across all tenants in a property, weighted by each tenant's proportional share of total rental income or square footage. WALT is a key risk metric in CRE underwriting — a longer WALT indicates more stable, predictable cash flows, while a short WALT signals near-term rollover risk that could affect NOI and DSCR.
Working Capital
The difference between current assets and current liabilities, representing the short-term liquidity available to fund day-to-day operations. Adequate working capital is essential for businesses to meet payroll, pay suppliers, and manage seasonal fluctuations. Negative working capital can signal financial distress and is a common underwriting red flag.
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