Approval Rate
The percentage of financing requests a lender or platform approves. Multi-lender platforms can raise approval rates by sending declined requests to additional lenders.
The complete A-Z reference for financing, lending, and financial terminology used by contractors, business owners, and their clients. Search, explore, understand.
In the home services industry, understanding financial language can be just as important as understanding the work itself. Whether you’re offering contractor financing to a homeowner or discussing loan terms with a lender, knowing your finance terminology is part of growing a successful contracting business.
This glossary brings together 200+ essential finance terms and definitions used daily by contractors, lenders, and financial professionals. From core lending concepts to credit terminology, this glossary of finance terms is built as a practical reference you can rely on in the field, during client conversations, or when onboarding new team members.
The percentage of financing requests a lender or platform approves. Multi-lender platforms can raise approval rates by sending declined requests to additional lenders.
A form of financing that splits a purchase into installments, often with little or no interest if paid on schedule. Common in retail and increasingly offered for home services, many buy now, pay later (BNPL) providers use a soft credit check to approve customers.
A document the homeowner signs confirming the work is finished. In contractor financing, lenders typically require a signed completion certificate before releasing funds to the contractor. Also called a certificate of completion.
Financing that lets an individual customer pay for a purchase over time instead of all at once. In home services, contractors offer consumer financing through third-party lenders to help homeowners say yes to larger projects. The lender typically pays the contractor in full and the homeowner repays the lender.
Financing programs contractors offer homeowners to pay for home improvement projects, including HVAC replacement, roofing, or remodeling. The homeowner requests financing through the contractor, often during the sales visit, and a lender funds the project.The term also refers to financing that contractors use to run their own businesses, such as working capital loans and equipment financing.
A fee the lender charges the contractor (the dealer or merchant) for offering a financing plan, deducted as a percentage of the financed amount when the loan funds. Low-rate and promotional plans, like 0% APR or same-as-cash, usually carry higher dealer fees because the contractor is buying down the homeowner’s rate. Some financing platforms let contractors set dealer fee tolerance levels.
A financing arrangement where interest accrues during a promotional period but is charged retroactively to the original purchase date if the balance is not paid in full by the end of the promotion. Contractors and homeowners should clearly understand the difference between deferred interest and true 0% APR offers, as unpaid balances can result in a large, unexpected interest charge.
Financing built directly into a business’s existing software, website, or checkout flow, so customers can make a request without leaving the sales process. For contractors, embedded lending usually connects through an API or a field service management platform.
A personal installment loan used specifically to finance home renovation or repair projects. May be secured (backed by home equity) or unsecured (based on creditworthiness alone).
A subscription model where a homeowner pays a fixed monthly fee for HVAC equipment, installation, and ongoing maintenance instead of buying the system outright. The provider or its financing partner typically keeps ownership of the equipment. Lowers the upfront cost for homeowners and creates recurring revenue for contractors.
A financing option where the homeowner leases equipment with regular payments and owns it at the end of the term, or sooner through an early purchase option. Approvals often rely less on credit scores, which makes lease-to-own financing a common option for homeowners who don’t qualify for traditional loans. However, the total cost is usually higher than a loan’s.
A group of lenders connected through one financing platform. Instead of partnering with a single lender, a contractor gets access to multiple lenders covering different credit tiers, loan amounts, and product types, so more homeowners can potentially find approval.
In the context of contractor financing, a merchant is the contractor or home improvement company that offers financing as a sales tool. Merchants partner with financing platforms to provide payment options to clients.
Through merchant financing, a business (the merchant) offers its customers payment options at the moment of purchase. It’s used across industries, from medical and auto repair to retail, to break big-ticket items down into monthly payments.
Property Assessed Clean Energy. A program that funds energy-efficiency, renewable energy, and resilience upgrades, repaid through an assessment on the homeowner’s property tax bill. Available only in states and localities that have authorized it. Because the assessment attaches to the property, it can take priority over an existing mortgage.
Financing offered at the time and place of a purchase or service agreement. In contractor sales, point of sale (POS) financing allows homeowners to request funding during or immediately after a sales consultation.
A financing plan with special terms for a limited time, such as 0% APR, deferred interest, same-as-cash, or a reduced rate. Promotions help close sales but usually carry higher dealer fees for the contractor. Homeowners should know exactly what happens when the promotional period ends.
Paying an upfront amount to lower the interest rate on a loan. In contractor financing, the contractor buys down the homeowner’s rate by accepting a higher dealer fee, which makes reduced-rate and 0% APR plans possible.
A promotional financing plan where the homeowner pays no interest if the full balance is paid within a set period, often 6, 12, or 18 months. Many same-as-cash plans use deferred interest, so interest back to the purchase date is charged if the balance isn’t paid off in time.
Financing from lenders that review requests that a prime lender declined. Second-look lenders often work with near-prime and subprime borrowers. In waterfall financing, declined requests move to second-look lenders automatically.
Conditions a lender requires before final approval or funding, such as proof of income, identity verification, proof of homeownership, or a signed completion certificate. Clearing stips quickly gets the contractor paid sooner.
Financing provided by an outside lender rather than the seller. When a contractor offers third-party financing, the lender approves the homeowner, pays the contractor, and collects the monthly payments, so the contractor doesn’t carry the credit risk.
A multi-lender approach to consumer financing. A homeowner’s request moves through a sequence of lenders, typically starting with prime lenders and moving to second-look and lease-to-own options, until one approves. Waterfall financing can provide more approval opportunities from a single request.In structured finance, the term also means the order of priority in which funds are distributed to creditors. In a foreclosure, the first mortgage is paid before subordinate debt. Understanding the waterfall matters when homeowners have multiple loans secured by their home.
Informal term for the expiration date of a rate lock, promotional financing offer, or loan commitment. Once an x-date passes, terms may change or the offer may expire. Contractors and homeowners should track x-dates to avoid losing favorable financing terms.
A financing arrangement where no interest is charged during the loan term. Truly zero-interest products transfer no finance charges to the borrower. When contractors offer zero-interest financing as a promotional tool, the merchant often subsidizes the cost through a dealer fee. Must be clearly distinguished from deferred-interest products in client-facing communications.
A promotional financing offer in which no interest is charged for a defined period. Distinct from deferred-interest offers. A zero percent APR promotion is one of the most effective selling tools in contractor financing. It allows homeowners to complete projects now and repay over time without any interest cost during the promotional window. Contractors typically fund the promotion by accepting a higher dealer fee.
A report that categorizes outstanding receivables or payables by how long they have been unpaid (e.g., 0-30 days, 31-60 days, 61-90 days, 90+ days). Helps contractors monitor cash flow health and flag at-risk accounts.
The short-term obligations a business owes to suppliers, vendors, or creditors for goods and services already received but not yet paid. Tracked on the balance sheet as a current liability.
Money owed to a business by customers for completed work or delivered goods. For contractors, AR represents invoiced jobs that haven’t been paid yet. High AR relative to cash can signal cash flow risk.
An accounting method that records revenues and expenses when they are earned or incurred, regardless of when cash actually changes hands. Contrasts with cash accounting and gives a more accurate picture of a business’s ongoing financial health.
Anything of economic value owned by an individual or business, including cash, equipment, vehicles, inventory, and real estate. On a balance sheet, total assets should equal total liabilities plus equity. Lenders evaluate assets when underwriting business loans for contractors.
The average revenue per completed job or sale, calculated by dividing total revenue by the number of orders. Offering financing tends to boost average order value (AOV) because homeowners can choose higher-tier equipment or a larger project scope when paying monthly.
A financial statement that provides a snapshot of a business’s financial position at a specific point in time, listing assets, liabilities, and owner’s equity. One of the three core financial statements typically reviewed when underwriting business credit for contractors.
The level of sales at which total revenue equals total costs, so the business neither makes nor loses money. Calculated by dividing fixed costs by the contribution margin per job or unit. Knowing this number helps contractors implement strategic pricing.
An accounting method that recognizes revenues and expenses only when cash is received or paid. Simpler than accrual accounting and common among smaller contracting businesses, though it may obscure the true financial picture when projects span billing periods.
The net movement of money into and out of a business over a specific period. Positive cash flow means more money is coming in than going out. Managing operating cash flow is one of the most critical financial skills for contractors, particularly those with seasonal revenue or long project cycles.
A financial statement that tracks cash inflows and outflows across three categories: operating activities, investing activities, and financing activities. Helps lenders and business owners understand the actual liquidity of a contracting business beyond what appears on the income statement.
Compensation paid to a salesperson or representative based on a percentage of sales generated. In contractor financing, some platforms offer referral or enrollment bonuses. Understanding commission structures helps contractors evaluate financing partnerships.
A measure of the average number of days it takes a business to collect payment after a sale or job completion. A key cash flow metric for contractors with net-30 or net-60 payment terms. Lower DSO means homeowners don’t delay payments on average.
The gradual reduction in the value of an asset over time due to wear, age, or obsolescence. In business accounting, depreciation is recorded as an expense on the income statement, reducing taxable income. Relevant when contractors purchase vehicles, equipment, or tools.
Earnings Before Interest, Taxes, Depreciation, and Amortization. A commonly used measure of a company’s core operating profitability, independent of financing structure and accounting policies. Lenders often evaluate EBITDA when underwriting business loans for contractors. This is also a key factor in calculating the value of an HVAC business.
A unique nine-digit tax identification number assigned to a business by the IRS. Often required to open business bank accounts, file taxes, apply for business licenses, and establish business credit. Sole proprietors without employees can often use a Social Security number instead. Typically, this is a prerequisite for contractors enrolling in commercial financing programs.
The value of an asset minus any outstanding debt secured against it. For homeowners, equity is the difference between the market value of their home and the balance on their mortgage. Equity is often used as collateral for home improvement loans, HELOCs, and cash-out refinances.
A formal record of a business’s or individual’s financial activities. The three primary statements are the balance sheet, income statement, and cash flow statement, commonly required by lenders when underwriting business financing for contractors.
Business expenses that stay the same no matter how much work a contractor completes, such as rent, insurance, software subscriptions, and salaried staff. Knowing how to calculate fixed and variable costs is the first step in setting prices and finding a break-even point.
Total income before taxes and deductions. Lenders use gross monthly income to calculate DTI ratios and evaluate loan eligibility. For self-employed contractors, gross income is reported on Schedule C or through business tax returns.
The difference between revenue and the cost of goods sold (COGS), expressed as a percentage of revenue. A key profitability metric for contracting businesses. Lenders may evaluate gross margin when assessing a contractor’s ability to service business debt.
A financial statement showing a business’s revenues, expenses, and profit or loss over a specific period. Also called a profit and loss (P&L) statement. Lenders review income statements when underwriting business loans for contractors.
A self-employed worker who provides services under contract rather than as an employee. Independent contractors receive Form 1099-NEC instead of a W-2, pay self-employment tax, and make their own estimated tax payments. Lenders verify their income with tax returns rather than pay stubs.
The amount added to set a contractor job’s price, expressed as a percentage of cost. A 50% markup on $10,000 in costs produces a $15,000 price. Markup isn’t the same as margin: that job’s gross margin is 33%.
The ongoing costs of running a business that aren’t tied to a specific job, such as office rent, insurance, vehicles, software, and administrative salaries. Contractors recover overhead by building it into the price of every job.
See Income Statement. A financial summary of a business’s revenues and expenses over a period of time. Contractors seeking business financing should maintain accurate P&L statements to present to lenders.
Money owed to a business by customers for completed work. In financing, receivables may be used as collateral for asset-based lending or factored to improve immediate cash flow.
A provision of the U.S. tax code that lets businesses deduct the full purchase price of qualifying equipment, vehicles, and software in the year it’s placed in service, instead of depreciating it over several years. Annual deduction limits apply. Contractors should confirm current limits and other tax deductions for independent contractors with a tax professional.
A measure of a small business’s earning power for a single owner-operator. Calculated as pre-tax profit plus the owner’s salary, depreciation, interest, and one-time or discretionary expenses. Buyers commonly value small contracting businesses as a multiple of SDE.
Expenses that rise and fall with the volume of work, such as materials, hourly labor, fuel, sales commissions, and dealer fees on financed jobs. Contractors track variable costs per job to understand true margins.
The difference between a business’s current assets and current liabilities. Measures short-term liquidity and the ability to meet day-to-day operational expenses. Positive working capital allows contractors to pay suppliers, fund payroll, and take on new projects without strain.
A budgeting approach where every dollar of income is assigned a purpose, starting from zero each budget cycle. Useful for contractors managing project cash flows or for homeowners budgeting for a renovation. Every expense must be justified without reference to prior period spending.
An individual granted permission to use another person’s credit account. Activity on the account may appear on the authorized user’s credit report, which can help build credit history. This is relevant for employees who use company cards or for family members helping a spouse establish credit for home improvement financing.
An individual or business that receives funds from a lender with the obligation to repay them under agreed-upon terms, including interest and schedule. In contractor financing, both the homeowner (consumer borrower) and the contractor (business borrower) may be borrowers in different program structures.
A second person who requests a loan jointly with the primary applicant. Because co-applicants share equal responsibility for repayment, both credit profiles are evaluated during underwriting. Common in home improvement financing when both homeowners are on the mortgage.
Similar to a co-applicant, a co-borrower shares equal legal responsibility for repaying a loan. Both the primary borrower’s and co-borrower’s credit, income, and financial history are considered in loan approval and pricing.
An asset pledged by a borrower to secure a loan. If the borrower defaults, the lender may seize the collateral to recover losses. Common forms include real estate, vehicles, and equipment.
An individual who agrees to repay a loan if the primary borrower defaults. Unlike a co-borrower, a cosigner does not typically benefit from the loan but shares full liability for it. A cosigner with strong credit can help a lower-credit borrower qualify for financing or secure a better rate.
An organization that collects and maintains consumer credit data and provides credit reports and scores to lenders. The three major U.S. bureaus are Equifax, Experian, and TransUnion. Lenders use bureau data to evaluate contractor financing requests.
A security measure that restricts access to a consumer’s credit report, preventing new credit accounts from being opened in their name. Homeowners who have placed a freeze must lift it temporarily before requesting financing or other credit products.
A record of a borrower’s past borrowing and repayment behavior, including accounts opened, payment timeliness, balances, and any negative events (late payments, defaults, bankruptcies). Maintained by credit bureaus and the primary basis for credit scores.
A request to access a consumer’s credit report. A hard inquiry (initiated by a lender during an application) can temporarily lower credit scores. A soft inquiry (such as pre-qualification or account monitoring) does not affect scores. Contractors should inform homeowners about hard inquiries before submitting financing applications.
The maximum amount a borrower is authorized to carry on a revolving credit account. For home improvement financing lines, the credit limit determines the maximum project cost that can be financed. Lenders set limits based on creditworthiness and income.
A detailed record of a consumer’s credit history, compiled by credit bureaus. Includes personal information, accounts, payment history, inquiries, and bankruptcies. Civil judgments and tax liens no longer appear on credit reports from the major bureaus. Lenders review credit reports to make underwriting decisions.
A numerical summary of a consumer’s creditworthiness, typically ranging from 300 to 850. Higher scores indicate lower risk. FICO Scores and VantageScores are the most common models. A consumer’s credit score typically determines whether they qualify for contractor financing and at what interest rate.
The percentage of available revolving credit currently in use. Calculated as the current balance divided by the total credit limit. Keeping utilization below 30% is generally recommended to maintain strong credit scores. Relevant when homeowners have high balances on existing cards before requesting home improvement financing.
A lender’s assessment of a borrower’s ability and willingness to repay debt. Evaluated through the Five Cs: Character, Capacity, Capital, Conditions, and Collateral. A creditworthy borrower qualifies for better loan terms and lower interest rates.
A measure of a business’s ability to cover its debt obligations from operating income. Calculated as Net Operating Income divided by Total Debt Service. Lenders commonly require a DSCR of at least 1.25 when underwriting contractor business loans.
The percentage of a borrower’s gross monthly income used to service debt payments. Calculated as total monthly debt payments divided by gross monthly income. Lenders use DTI to evaluate consumer loan requests. A DTI below 36% is generally considered favorable, though limits vary by lender and loan type.
The investigation and verification process conducted by lenders, investors, or businesses before entering a financial agreement. For contractor loan programs, due diligence includes verifying licensing, insurance, business history, and financial statements.
The company that created the FICO Score, the most widely used credit scoring model in the U.S. FICO Scores range from 300 to 850 and are used by most lenders, including those offering contractor financing programs. Learn more at myFICO.
Policies and systems used by lenders and financing platforms to detect and prevent fraudulent financing requests, identity theft, and unauthorized account activity. Robust fraud prevention protects contractors from being held liable for financing associated with fraudulent projects.
The percentage of a borrower’s gross monthly income allocated to housing costs (mortgage, insurance, taxes). Also called the housing expense ratio. Lenders use it alongside DTI to assess mortgage eligibility. Relevant when homeowners seek to finance renovation projects through cash-out refinancing.
A promise by a third party (guarantor) to repay a debt if the primary borrower defaults. Personal guarantees are commonly required by lenders when extending credit to small businesses, including contractor companies. Signing a personal guarantee means the owner’s personal assets may be at risk.
An individual or entity that provides a guarantee on behalf of a borrower. Common in small business lending, where many lenders require a business owner’s personal guarantee before extending commercial credit. A guarantor with strong credit and assets strengthens a loan request.
A credit report inquiry initiated by a lender when a consumer formally applies for credit. Typically, it reduces the applicant’s credit score by a few points and remains on the credit report for two years. Contractors should explain the difference between hard and soft pulls when presenting financing options to homeowners.
The process by which a lender confirms a borrower’s reported income through documents such as pay stubs, W-2s, tax returns, or bank statements. Required for most consumer loans. May be less stringent (stated income) for some small business and contractor products. See also Verification of Income (VOI).
A loan application submitted by two or more borrowers, such as a married couple. Lenders evaluate the combined income and credit profiles of all applicants. A joint application can improve approval odds or loan terms when one applicant has a stronger credit profile.
The ratio of a loan amount to the appraised value of the asset securing it. Calculated as the loan amount divided by the property value. A lower LTV indicates more equity and less lender risk, often resulting in better loan terms. LTV is a key factor in HELOC and home equity loan approvals.
A borrower whose credit falls between prime and subprime, often with FICO scores in the low-to-mid 600s, though each lender sets its own cutoffs. Near-prime customers may qualify for financing at higher rates or with fewer promotional options than prime borrowers.
A legal commitment by an individual, typically a business owner, to personally repay a business debt if the business defaults. Most small business lenders require personal guarantees, meaning the owner’s personal assets (home, savings) are at risk if the business fails to repay.
A conditional commitment from a lender indicating a borrower qualifies for a loan up to a specified amount, pending verification of applicant information. Pre-approval carries more weight than pre-qualification and signals serious intent in home improvement financing contexts.
An initial, non-binding assessment of a borrower’s likely eligibility for a loan, based on self-reported information and often a soft credit pull. Helps borrowers understand their options without affecting their credit score. Many contractor financing platforms offer pre-qualification to homeowners before a formal application.
A borrower with strong credit, often a FICO score in the high 600s or above, though each lender sets its own cutoffs. Prime borrowers qualify for the lowest rates and the best promotional offers, like 0% APR.
A lender’s guideline for the maximum percentage of income that can be committed to debt payments. Commonly referenced as front-end ratio (housing expenses) and back-end ratio (all debts). Used in mortgage and home equity loan underwriting.
Income earned by individuals who work for themselves, such as sole proprietors or independent contractors, subject to independent contractor taxes. Lenders treat self-employed income differently, typically averaging two years of tax returns and discounting business expenses to determine qualifying income. Important for contractor owners seeking personal or business financing.
A credit check that does not affect the borrower’s credit score. Used for pre-qualification, background checks, and account monitoring. Many contractor financing platforms use soft pulls to pre-qualify homeowners before a formal application. Encourages borrowers to explore financing without fear of credit impact.
A borrower with lower credit scores, often below 620, or a limited credit history. Each lender sets its own cutoffs. Subprime customers may still qualify through second-look lenders or lease-to-own programs, usually at a higher total cost.
The process by which a lender evaluates a loan application to determine the risk of lending and whether to approve, modify, or decline the applicant. Includes analyzing credit scores, income, assets, debt, and collateral. Fast underwriting is a key feature of modern contractor financing platforms.
The process of confirming a borrower’s reported income through documentation or bank data. Lenders use VOI to ensure borrowers have sufficient income to repay their loans. Digital income verification through bank account linking has accelerated this process for online lending platforms.
A written notice that federal law (the Fair Credit Reporting Act and Equal Credit Opportunity Act) requires a lender to send when declining a credit application or offering less favorable terms. Must either state the specific reasons for the decision or tell the applicant they can request them within 60 days. It must also explain the applicant’s credit reporting rights.
A contractual provision requiring that disputes between a borrower and lender be resolved through arbitration rather than court proceedings. Common in consumer loan agreements, including those used in home improvement financing.
The U.S. federal agency responsible for enforcing consumer financial protection laws, overseeing financial products and services, and educating consumers about credit and lending. Lenders offering home improvement financing must comply with federal consumer financial laws, including CFPB regulations.
A required statement of financial terms, fees, and conditions that lenders must provide to borrowers before completing a transaction. Federal laws (TILA, RESPA) mandate specific disclosures in consumer lending. Transparency in disclosures protects both borrowers and contractors offering financing programs.
A federal law prohibiting creditors from discriminating against applicants based on race, color, religion, national origin, sex, marital status, age (if the applicant can legally enter a contract), receipt of public assistance, or the good-faith exercise of rights under the Consumer Credit Protection Act. Applies to all lenders offering contractor financing or consumer home improvement loans. Read more at the CFPB’s ECOA page.
A federal law that governs the collection, dissemination, and use of consumer credit information. Gives consumers the right to access their credit reports, dispute inaccuracies, and be informed when adverse action is taken based on their credit file. See the full text and consumer resources at the FTC’s FCRA page.
A standardized form used in real estate transactions to itemize all charges and fees associated with a settlement or closing. Since October 2015, most mortgage closings use the Closing Disclosure instead, under the CFPB’s TRID rules. The HUD-1 is still used for reverse mortgages and some other transactions TRID doesn’t cover.
A regulatory requirement for financial institutions and lenders to verify the identity of their customers before opening accounts or providing services. Prevents money laundering, fraud, and identity theft. Contractor financing platforms usually conduct KYC checks during the onboarding of new merchant accounts.
A federal law governing real estate settlement processes and prohibiting kickbacks and undisclosed fee arrangements. Applies to mortgage and HELOC transactions. Contractors offering referrals to mortgage lenders should ensure RESPA compliance. The CFPB now writes and enforces RESPA’s rules (Regulation X). See the CFPB’s RESPA resources.
A federal law requiring lenders to disclose the cost of credit in standardized terms, including APR, finance charges, and total payment amounts. Ensures consumers can make informed comparisons between loan products. Most consumer home improvement loans are covered. Loans above an annual threshold ($73,400 in 2026) are exempt unless they’re secured by real estate, and lease-to-own products typically fall under the Consumer Leasing Act instead. See the CFPB’s TILA resources.
The practice of charging excessively high interest rates on loans. Usury laws set legal maximums for interest rates in many states. Lenders offering contractor financing programs must comply with applicable usury statutes in each state where they operate.
A mortgage with an interest rate that changes periodically based on a benchmark index. The initial rate is typically lower than that of a fixed-rate mortgage, but payments can increase over time. This comes up when homeowners finance large renovation projects through their mortgage. See the CFPB’s ARM guide for more information.
A type of business financing where the loan is secured by specific assets, such as accounts receivable, inventory, or equipment. Useful for contractors who may not qualify for unsecured credit but have substantial physical assets.
A short-term loan designed to provide temporary financing until permanent funding is secured or a property is sold. Useful for contractors who need to fund materials for a large project before customer payments or long-term financing are in place.
The borrowing capacity and financial trustworthiness of a business entity, separate from the owner’s personal credit. Established through consistent payment history with vendors, lenders, and suppliers. Strong business credit allows a contractor to access working capital without pledging personal assets.
Financing extended to businesses rather than individual consumers. Includes term loans, lines of credit, equipment financing, and SBA loans. Underwriting criteria differ from consumer credit and typically require business financial statements and tax returns.
Financing extended to individuals for personal, family, or household purposes. Governed by federal laws, including the Truth in Lending Act (TILA) and Equal Credit Opportunity Act (ECOA). Home improvement financing programs, personal loans, and HELOCs are all forms of consumer credit.
The ability to borrow money or access goods and services now, with the agreement to pay later. In financial contexts, "credit" also refers to a positive entry on a financial account, a borrower’s creditworthiness, or the total amount of borrowing available.
A loan with a fixed interest rate and consistent monthly payment amount from origination through maturity. Preferred by borrowers who want budget certainty. Common in personal home improvement loans and HELOCs that transition from variable to fixed.
A revolving line of credit secured by a homeowner’s equity. Offers flexible access to funds up to a set limit, typically with a variable interest rate. Often used to finance home improvement projects. HELOCs are repaid during a draw period (often interest-only) and then a repayment period. The home serves as collateral, making non-payment a foreclosure risk. See the CFPB’s HELOC guide for details.
A fixed-rate, lump-sum loan secured by a homeowner’s equity. Sometimes called a second mortgage. Proceeds are often used for large home improvement projects. Unlike a HELOC, the borrower receives all funds at once and repays them in equal monthly installments.
A loan repaid through a fixed number of scheduled payments over a set term. Each payment reduces the principal and covers interest. Most home improvement financing products are installment loans, offering homeowners predictable monthly payments.
A mortgage that exceeds the conforming loan limits that the Federal Housing Finance Agency (FHFA) sets for loans backed by Fannie Mae and Freddie Mac. Typically carries stricter qualification requirements and higher interest rates. Relevant when high-net-worth homeowners finance major renovations through refinancing on high-value properties.
A contractual agreement where one party (the lessee) pays another (the lessor) for the right to use an asset for a defined period, without purchasing it outright. Common for contractors who lease vehicles or equipment. Differs from a loan in that the lessee does not own the asset.
A form of business financing where a lender provides a lump sum in exchange for a percentage of future credit card or debit card sales. Repayment is automatic and fluctuates with revenue. Generally more expensive than traditional loans; factor rates rather than APRs are typically used for pricing. Best suited for short-term needs when other financing options are unavailable.
A loan secured by real estate, used to purchase or refinance property. Homeowners often access mortgage equity through cash-out refinancing to fund major renovations. Understanding mortgage basics helps contractors engage in informed conversations with homeowners about financing options. For regulatory guidance, see the CFPB’s mortgage resources.
A revolving credit arrangement with no fixed repayment schedule, where the borrower can draw, repay, and redraw funds up to the credit limit. Credit cards and HELOCs are examples. Contrasts with closed-end (installment) credit, where a fixed amount is borrowed and repaid over a set term.
An unsecured installment loan based on the borrower’s creditworthiness, not backed by specific collateral. Common for home improvement financing, with lender limits often between $50,000 and $100,000. Personal loans offer predictable monthly payments and no risk to the home itself (unlike HELOCs).
A lender that originates loans and holds them in its own portfolio rather than selling them to the secondary market. Portfolio lenders have more flexibility in underwriting criteria, which can benefit borrowers with non-traditional income or credit profiles.
A type of credit that allows borrowers to use funds, repay them, and reuse them up to the credit limit. Credit cards and HELOCs are revolving credit products. Unlike installment loans, there is no fixed repayment schedule. Minimum payments are required, but borrowers can pay more to reduce the balance faster.
A small business loan partially guaranteed by the U.S. Small Business Administration. Designed to make capital more accessible to small businesses. Common types include 7(a) loans for general working capital and 504 loans for fixed assets. Available through SBA-approved lenders with longer terms and lower rates than conventional business loans.
A loan secured by a home in addition to the primary mortgage. Home equity loans and some HELOCs are second mortgages. In a foreclosure, the first mortgage is paid off first, making second mortgages riskier for lenders. As a result, they often carry higher interest rates.
A loan backed by collateral that the lender can seize if the borrower defaults. Home equity loans, auto loans, and equipment financing are common secured loan types. Generally offer lower interest rates than unsecured loans due to reduced lender risk.
A loan that ranks below another loan in priority for repayment in the event of default or foreclosure. A second mortgage is subordinate to the first mortgage. Higher subordination risk typically results in higher interest rates on the subordinate loan.
A loan for a fixed amount, repaid on a regular schedule over a defined period. The most common type of business and personal loan. Provides predictable payments and a clear payoff date. Widely used in contractor financing for equipment, vehicles, and working capital.
A short-term loan secured by the title to a vehicle. High-risk and high-cost; generally not recommended for business financing. Distinct from title insurance used in real estate transactions.
A loan not backed by collateral, relying entirely on the borrower’s creditworthiness. Personal loans for home improvement are typically unsecured, meaning the borrower’s home is not at risk, but interest rates are generally higher than those for secured alternatives.
A short-term loan used to fund a business’s day-to-day operations rather than long-term investments. Working capital loans can help contractors cover payroll, materials, and overhead during slow periods or while waiting on client payments.
An electronic network used to process direct bank-to-bank transfers. Lenders often use ACH to collect loan repayments. Contractors often use it to pay vendors or receive customer payments without checks. Governed by Nacha, the organization that sets the rules for the ACH network.
A written amendment to a contract that changes a project’s scope, price, or timeline after work begins. Signed change orders protect both parties. On financed jobs, a price change may also need lender approval before the funded amount changes.
A charge against a financial account that reduces its balance. In accounting, a debit increases asset and expense accounts and decreases liability and equity accounts. Contrasts with a credit entry.
An upfront payment a homeowner makes to secure a contract and start the job, often used to order materials. Some states cap deposits on home improvement contracts. In California, for example, the limit is $1,000 or 10% of the contract price, whichever is less.
The electronic transfer of funds directly into a bank account. Lenders often deposit loan proceeds via direct deposit. Many financing platforms also disburse contractor payments directly to the business’s bank account once work is verified.
A disbursement of funds from a line of credit or construction loan. In construction and contractor financing, draws are often made in stages as project milestones are completed, rather than as a single lump sum.
A plan that outlines when and how construction loan funds will be disbursed based on project milestones. Lenders typically require inspections or documentation before releasing each draw. Helps both lenders and contractors manage risk during long-duration projects.
The electronic movement of money between bank accounts via networks such as ACH or wire transfer. Used by lenders to disburse loan proceeds and collect repayments. Enables faster, more reliable payment processing than checks. Consumer EFTs other than wire transfers are governed by the Electronic Fund Transfer Act.
The time between when a payment is made and when the funds are actually deducted from the payer’s account. In financial planning, float can affect cash flow timing for businesses that process large volumes of checks or ACH transactions.
A formal document issued by a contractor to a client requesting payment for services rendered or materials supplied. In financing transactions, the invoice may be used to verify the scope and cost of work before funds are disbursed.
A credit or banking account held by two or more individuals, each with equal rights and responsibilities. Each holder can typically access the funds and is responsible for any debt on the account. Not the same as a joint application, where two people apply for one loan together.
A legal claim a contractor, subcontractor, or supplier can file against a property when they aren’t paid for labor or materials. Notice requirements and filing deadlines vary by state. An unresolved lien can block a sale or refinance of the property.
The condition in which withdrawals from a bank account exceed the available balance. Lenders offering ACH repayment may charge returned payment fees if a borrower’s account is overdrawn on a due date. Some banks charge overdraft fees as well.
A payment made at defined stages of a project rather than all at completion, often tied to a draw schedule or completed milestones. Progress payments keep cash flowing on long jobs and limit how much a contractor has at risk if a client stops paying.
A percentage of each payment, often 5% to 10%, that a client withholds until the project is substantially complete. It protects the client if work is unfinished or defective. More common on commercial and large residential jobs, retainage can hold back a large share of a contractor’s profit until closeout.
An electronic transfer of funds between financial institutions, typically processed the same day. Faster than ACH transfers but often carries a fee. Lenders may use wire transfers for large loan disbursements, and contractors may receive wire payments for major commercial projects.
Interest that has accumulated on a loan or debt obligation since the last payment but has not yet been paid. Relevant when calculating the true payoff balance of a contractor or consumer loan.
A yearly charge levied by a credit card issuer or lender for access to a credit product. Not typically associated with installment loans used in contractor financing, but relevant when contractors carry business credit cards for purchasing.
The total cost of borrowing, expressed as an annual rate, including the interest rate and most required finance charges, such as origination or processing fees. APR is the standardized comparison tool for loan products under the Truth in Lending Act. A 0% APR promotional offer means no interest is charged during the promotional period, a common contractor financing incentive.
The effective rate of return on a savings or deposit account that accounts for compounding interest. Contrasts with APR, which applies to borrowed funds. Relevant for contractors managing business savings or cash reserves.
A charge some lenders collect at the time a borrower applies for a loan or line of credit. It may or may not be refundable if the application is denied. Consumer protection rules in some states restrict or prohibit these fees.
One-hundredth of one percentage point (0.01%). Used to describe small changes in interest rates or fees. A lender raising its rate from 6.50% to 6.75% has increased it by 25 basis points. Understanding basis points helps contractors compare financing program pricing with precision.
Interest calculated on both the original principal and accumulated interest from previous periods. Grows faster than simple interest over time. Relevant for revolving debt and savings calculations. Most installment loans used in contractor financing use simple interest rather than compound interest.
A measure of the average change in prices paid by consumers for a basket of goods and services. Used to track inflation. Rising CPI can prompt the Federal Reserve to raise interest rates, which affects the cost of lending products, including contractor financing programs.
In lending, the interest rate that the Federal Reserve charges commercial banks for short-term loans. Changes to the discount rate influence broader borrowing costs, including those for home improvement financing products. In business finance, it also refers to the rate used to calculate the present value of future cash flows. In contractor financing, a merchant discount rate is the percentage a lender deducts from the funded amount, the same idea as a dealer fee. See the Federal Reserve Discount Rate.
A fee charged at the end of a lease term when the lessee does not purchase the asset or renew the lease. Relevant for contractors who lease vehicles or equipment and must choose between buying out the lease or returning the asset.
See Prepayment Penalty. A fee charged for paying off a loan before the scheduled maturity date. Not universal, as many personal loan and home improvement financing products are prepayment-free.
The actual annualized cost of borrowing after accounting for compounding and fees, as opposed to the stated nominal rate. Provides a more accurate basis for comparing loan products.
A charge imposed by a lender when a borrower pays off a loan early or exits a financing arrangement. Similar to a prepayment penalty. Contractors should review loan agreements for exit fees before recommending products to homeowners.
A pricing method used in merchant cash advances and some short-term business loans. Expressed as a decimal multiplier (e.g., 1.25), the factor rate is applied to the total amount borrowed to calculate the total repayment amount. Unlike APR, a factor rate does not represent an annualized cost and can be misleading without further calculation.
An interest rate that remains constant throughout the life of a loan, regardless of market changes. Provides payment predictability for borrowers. Most home improvement installment loans carry fixed rates, making them easy for homeowners to budget around. See also Fixed-Rate Loan.
A reference interest rate used to calculate the variable rate on an adjustable-rate loan. Common indexes include the Prime Rate, SOFR (Secured Overnight Financing Rate), and the 1-year Treasury. When the index rises, variable-rate loan payments increase accordingly.
The cost a lender charges for the use of borrowed funds, expressed as a percentage of the outstanding balance. Interest is the primary source of lender revenue and the primary cost of borrowing for homeowners financing home improvement projects.
The percentage charged on the principal of a loan over a given period, typically expressed as an annual rate. Determines the cost of borrowing before fees are added. Compare to APR, which includes fees. Interest rates in home improvement lending vary widely based on creditworthiness, loan type, and market conditions.
A penalty charge assessed when a borrower fails to make a payment by the due date or end of any grace period. Amounts vary by lender and are disclosed in the loan agreement. Repeated late fees signal financial stress and can lead to account delinquency.
An upfront fee charged by a lender to cover the cost of processing and underwriting a new loan. May be expressed as a flat dollar amount or percentage of the loan amount. Origination fees are included in the APR calculation and should be compared across competing loan offers.
Daily interest accrued on an outstanding loan balance. Relevant when calculating payoff amounts, as interest continues to accumulate between the statement date and the actual payoff date.
Upfront fees paid to a lender at closing to reduce the interest rate on a mortgage. One point equals 1% of the loan amount. "Buying down the rate" can reduce monthly payments and total interest over the life of the loan. Relevant when homeowners refinance to fund major renovations.
A fee charged by some lenders when a borrower pays off a loan before the scheduled maturity date. More common in commercial and mortgage products than in personal home improvement loans. Borrowers should confirm whether a prepayment penalty applies before selecting a loan product.
A benchmark interest rate used by commercial banks as a base for consumer and business lending. Typically set at 3 percentage points above the federal funds rate. Many variable-rate loans, including HELOCs, use the Prime Rate as their index. When the Fed raises rates, the Prime Rate rises accordingly.
A lender’s commitment to hold a specific interest rate for a borrower for a defined period, typically 30 to 60 days, while the loan is processed. Protects borrowers from rate increases between request and closing. Relevant for homeowners financing large renovation projects through refinancing.
A lending practice in which interest rates and loan terms are adjusted based on the assessed risk of a borrower defaulting. Borrowers with higher credit scores and lower DTI receive better rates; higher-risk borrowers receive higher rates or may be declined. The basis of most consumer lending pricing models.
Interest calculated only on the principal balance of a loan, not on previously accrued interest. Most personal and home improvement installment loans use simple interest, making them more transparent and less expensive than products that use compound interest.
The sum of all payments made over the life of a loan, including principal, interest, and fees. A useful comparison point when evaluating different loan amounts, terms, and interest rates. Helps contractors and homeowners understand the true long-term cost of a financing decision.
Interest that has been charged or collected on a loan but has not yet been earned by the lender because the loan term has not elapsed. Relevant in prepayment scenarios. Some lenders must rebate unearned interest when loans are paid off early.
An interest rate that changes over time in response to fluctuations in a benchmark index, such as the Prime Rate or SOFR. Monthly payments may increase or decrease as the rate adjusts. Common in HELOCs and adjustable-rate mortgages. Borrowers should understand how rate caps work when considering variable-rate financing.
The return earned on an investment or loan, expressed as a percentage. From a lender’s perspective, yield on a loan includes interest income and fees. From an investor’s perspective, yield reflects the return on a bond or other fixed-income security. Lenders on financing platforms evaluate expected yield when pricing loan products.
The difference between the interest rates on two different debt instruments, often used to express the premium a lender charges over a benchmark rate. Relevant when comparing loan pricing in lending-as-a-service platforms or understanding how a lender prices risk in its portfolio.
A loan provision that allows the lender to demand full repayment of the outstanding balance immediately if the borrower misses a payment, violates a contract term, or experiences a significant financial change. Commonly found in mortgages and contractor financing agreements.
The scheduled repayment of a loan through regular installment payments that cover both principal and interest. Early payments are largely interest, while later payments typically shift toward principal. For contractors offering financing, amortization schedules help homeowners understand the true cost of a project over time.
A complete table of periodic loan payments showing the principal and interest breakdown for each payment period, the running balance, and the total cost over the life of the loan. Used by borrowers to plan payments and track payoff progress.
An arrangement allowing a lender to automatically withdraw loan payments from a borrower’s bank account on the due date. Often incentivized with a small interest rate discount. Reduces missed payments and the risk of late fees in consumer financing agreements.
A receivable that is uncollectible and written off as a loss. For contractors, bad debt typically arises when clients fail to pay invoices after collection efforts are exhausted. It may be tax-deductible if the contractor uses accrual accounting.
The amount currently owed on a loan, credit card, or other financial obligation. May refer to the outstanding principal, the total owed including accrued interest, or the current statement balance on a revolving account.
A large, lump-sum payment due at the end of a loan term after a series of smaller, often interest-only, installment payments. Common in commercial real estate financing and some short-term business loans. Borrowers must plan ahead for the balloon payment or refinance before it comes due.
A legal process through which individuals or businesses unable to repay debts can seek relief, either by liquidating assets (Chapter 7) or restructuring debts (Chapter 11 or Chapter 13). A bankruptcy filing can significantly impact credit scores and the ability to access financing for several years.
The point at which a lender writes off a delinquent account as a loss after a defined period of non-payment, typically 120 to 180 days. The debt may still be owed and pursued by a collections agency. A charge-off is a severe negative mark on a consumer’s credit report.
The process of pursuing repayment of delinquent accounts, either internally by the original creditor or externally through a collections agency. Accounts sent to collections significantly damage credit scores and may result in legal action or wage garnishment.
Money owed by one party to another, typically with an obligation to repay principal and interest over time. Includes mortgages, personal loans, business loans, and credit card balances. Managing debt-to-income ratios is critical for both contractors seeking business financing and homeowners requesting home improvement loans.
Combining multiple debts into a single loan, often with a lower interest rate or longer repayment term. Simplifies payments and may reduce monthly obligations. Relevant for homeowners looking to finance renovation projects while managing existing debt.
The failure to fulfill the terms of a loan agreement, most commonly by missing payments for an extended period. Defaulting can trigger acceleration clauses, damage credit scores, result in collections, and lead to legal action or repossession of collateral.
A temporary postponement of loan payments, typically granted by a lender in cases of hardship. Interest may or may not continue to accrue during the deferment period. Some contractor financing programs offer deferred interest promotions, which differ from true 0% interest periods.
A status indicating that a borrower has missed one or more scheduled loan payments. Typically classified by time: 30, 60, or 90+ days delinquent. Delinquency is reported to credit bureaus and damages credit scores. Lenders may charge late fees and restrict future credit access.
An upfront cash payment made by the borrower toward the total purchase price, reducing the amount financed. A larger down payment lowers monthly payments and may improve loan terms. In some home improvement financing programs, no down payment is required, making projects more accessible to homeowners.
The date by which a loan payment must be received to avoid a late fee or delinquency status. May differ from the payment processing date for ACH or mailed checks. Contractors should ensure homeowners understand payment due dates when setting up financing arrangements.
A neutral third-party arrangement where funds are held until specific conditions are met. Used in real estate transactions and sometimes in construction financing to ensure contractors are paid after work is completed and verified.
A temporary reduction or suspension of loan payments granted by a lender, typically during financial hardship. Unlike deferral, forbearance may allow interest to accrue on the unpaid amount, increasing the eventual balance. Distinct from a loan modification, which permanently changes loan terms.
The legal process by which a lender repossesses and sells a property when a homeowner defaults on a mortgage or home equity loan. Homeowners using HELOC-secured financing should understand that the home is at risk if they fail to repay.
The disbursement of approved loan proceeds to the borrower or, in contractor financing programs, directly to the contractor after project completion. Funding timelines vary by lender and program. Faster funding reduces cash flow gaps for contractors.
A legal process by which a creditor obtains a court order directing an employer or bank to withhold a portion of a debtor’s wages or bank funds to satisfy an outstanding debt. It can affect a contractor’s or homeowner’s ability to repay other financial obligations.
A set period after a payment due date during which a payment can be made without incurring a late fee or penalty. Common in credit cards and some installment loan agreements, though not universal. Contractors should check whether homeowner financing products include a grace period.
A court ruling that a debtor owes money to a creditor. A judgment may allow the creditor to garnish wages, levy bank accounts, or place a lien on property. Since 2017, civil judgments no longer appear on credit reports from the major bureaus, but the underlying debt may still show up as a collections account.
A legally binding contract between a borrower and lender that specifies all loan terms, including amount, interest rate, repayment schedule, fees, and consequences of default. All parties should read and understand the loan agreement before signing.
A permanent change to the original terms of a loan, such as lowering the interest rate, extending the term, or reducing the principal. Typically granted to borrowers experiencing hardship. Distinct from forbearance, which is temporary.
The process by which a lender evaluates, approves, and funds a new loan. Includes request intake, underwriting, approval, disclosure, and disbursement. Loan origination fees are often charged to cover the cost of this process.
Software that manages the lending process from request through underwriting, approval, documentation, and funding. Lenders and lending-as-a-service platforms use an LOS to automate credit decisions and track every loan.
The ongoing management of a loan after origination, including collecting payments, maintaining records, managing escrow accounts, and handling delinquencies. Lenders may service their own loans or transfer servicing to a third party.
The length of time over which a loan must be repaid. Common terms for home improvement loans range from 12 to 144 months, with some running as long as 240 months. Longer terms reduce monthly payments but increase total interest paid. Shorter terms cost less in interest but require higher monthly payments.
Strategies and programs used by lenders to minimize financial losses when borrowers default or are at risk of default. Includes loan modifications, forbearance, short sales, and deed-in-lieu of foreclosure. Lenders offering contractor financing programs may have loss mitigation protocols for delinquent accounts.
The date on which a loan’s final payment is due and the debt is fully repaid. After the maturity date, the account is closed. If a balloon payment is required, it is typically due on the maturity date.
The smallest amount a borrower must pay each billing cycle to keep an account in good standing. For revolving accounts, paying only the minimum can prolong debt repayment and lead to significant interest accumulation. For installment loans, the minimum payment is typically the full scheduled payment.
The fixed amount due each month under a loan’s amortization schedule. When financing home improvement projects, the monthly payment is a key decision factor. Contractors can use payment calculators to show estimated monthly costs during the sales process.
A situation in which scheduled loan payments are insufficient to cover the accrued interest, causing the outstanding balance to increase rather than decrease. Can occur with certain adjustable-rate products. Borrowers should watch for negative amortization clauses in loan agreements.
The total amount currently owed on a loan or credit account, including principal and accrued interest. The outstanding balance decreases with each payment and reaches zero at payoff.
A record of whether a borrower has made loan payments on time. The most heavily weighted factor in most credit scoring models, accounting for approximately 35% of a FICO Score. A consistent on-time payment history is the foundation of strong credit.
The exact amount required to fully satisfy a loan on a specific date, including remaining principal, accrued interest, and any applicable fees. Borrowers should request a formal payoff letter from the lender when planning to pay off a loan early.
Making loan payments ahead of schedule, either through extra monthly payments or a lump-sum payoff. Reduces total interest paid. Some loans include prepayment penalties to compensate lenders for lost interest income.
The original amount of money borrowed, excluding interest or fees. Each loan payment reduces the principal balance over time. At payoff, the outstanding principal is zero.
A lender’s legal right to pursue additional assets or sources of repayment beyond the collateral if a borrower defaults. Recourse loans give lenders broader recovery options than non-recourse loans.
Replacing an existing loan with a new one, typically to obtain a lower interest rate, reduce monthly payments, extend the term, or access equity. Homeowners often refinance to fund major home improvements. Cash-out refinancing allows homeowners to borrow against their equity in a single mortgage transaction.
The phase of a loan or HELOC during which the borrower is required to make payments that reduce the outstanding balance. For HELOCs, this follows the draw period. For installment loans, it begins immediately after the loan is funded. See also Repayment Term.
The total length of time over which a loan must be repaid. Measured in months or years. Longer terms reduce monthly payments but increase total interest paid. Contractors should help homeowners select a term that fits their budget while minimizing total cost.
A legal document specifying the terms under which a borrower pledges collateral to secure a loan. Creates a security interest in the asset in favor of the lender. Required for all secured commercial loans.
A lender’s legal right to take possession of and sell collateral if a borrower defaults. Must be properly documented and, in many cases, filed with the state to be enforceable against third parties.
The date on which a lender produces a billing statement for a credit account, showing the period’s transactions, current balance, minimum payment due, and due date. Different from the payment due date, which is typically 21 or more days after the statement date.
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Disclaimer: Finturf is not a lender. Finturf does not make loans, approve credit, or provide financial, legal, tax, or lending advice. The definitions in this glossary are for general educational purposes only. Laws and lender programs change over time. Financing offered through Finturf is provided by third-party lenders and is subject to credit approval and each lender’s terms. Review the lender’s disclosures and consult a qualified professional before making financing decisions.