BDC Loan Terms Flashcards: 15 Private Credit Terms
A 15-card practice deck for the private-credit terms that matter when reading BDC filings, loan documents and earnings reports.
Academy practice deck. Estimated time: 8 minutes.
Credit has a dialect.
Some of its words describe how a lender gets paid. Others describe who gets paid first when the plan fails. A few can make weak cash collection look sturdier than it is.
These 15 flashcards are part of The Drift Academy and cover the language that appears repeatedly in Business Development Company (BDC) filings and private-credit discussions. Try to answer each question before opening it. Recognition feels fluent; retrieval proves it.
Test the terms
Private Credit Foundations
15 loan terms worth knowing cold
Answer aloud before opening each card. Mark it only when you can explain both the definition and why it matters.
0 of 15 terms mastered
What is a Business Development Company?
Business Development Company (BDC): a closed-end company that elects BDC status under the Investment Company Act of 1940, operates to invest in qualifying businesses, and makes managerial assistance available as the law requires. Publicly traded BDCs give retail investors a market-traded route into portfolios that commonly include private-company debt and equity.
What is the Secured Overnight Financing Rate?
Secured Overnight Financing Rate (SOFR): a broad measure of the cost of borrowing cash overnight using U.S. Treasury securities as collateral. Many floating-rate loans add a spread to a SOFR convention.
What is a loan spread?
Spread: the additional interest rate charged above a benchmark. “SOFR plus 6%” uses a six-percentage-point spread to compensate the lender for credit, liquidity, structure and profit.
What is an interest-rate floor?
Floor: the minimum benchmark used to calculate a floating coupon. If the stated benchmark falls below the floor, the floor is used before adding the spread.
What is cash interest?
Cash interest: interest paid in money during the period. It creates current liquidity for the lender, unlike non-cash interest that enlarges a receivable.
What is Payment-in-Kind interest?
Payment-in-Kind (PIK): interest added to the loan balance rather than paid in current cash. It can be reported as income while collection remains dependent on future repayment.
What is Original Issue Discount?
Original Issue Discount (OID): the difference created when a debt instrument's issue price is below the amount due at maturity. For a performing loan, accounting rules generally recognize that discount into interest income over the instrument's life using an effective-yield method.
What is loan amortization?
Amortization: scheduled repayment of principal before final maturity. It reduces the balance still at risk but is returned capital, not lender income.
What is loan maturity?
Maturity: the contractual date when remaining principal is due. A borrower may repay, refinance, amend or default; the date itself does not guarantee cash will arrive.
What is principal?
Principal: the contractual amount borrowed or still owed, subject to the loan's terms. Repayment returns the lender's capital and should not be confused with income.
What does first lien mean?
First lien: a claim intended to have first-priority security interest in specified collateral. Priority can improve recovery prospects, but collateral value and documentation still matter.
What does senior secured mean?
Senior secured: debt that is senior in payment priority and backed by collateral. The phrase describes position in the capital structure, not a promise of full recovery.
What is a non-accrual loan?
Non-accrual: a loan on which the lender has stopped recognizing contractual interest under its accounting policy because collection is sufficiently doubtful. It is a lagging but important stress signal.
What is a recovery rate?
Recovery rate: the percentage of the relevant claim recovered after default or restructuring. Timing and workout costs also affect the lender's economic result.
What is Internal Rate of Return?
Internal Rate of Return (IRR): the annualized discount rate that equates modeled cash outflows and inflows in present-value terms. A loan-level IRR is not a BDC shareholder return.
How to use the deck
Run the cards once without notes. Mark a card “Got it” only if you could explain the term to another person and connect it to a loan's cash flows or priority.
On the second pass, open the BDC Loan Economics Calculator and find the terms that become adjustable assumptions: benchmark, floor, spread, Payment-in-Kind (PIK), Original Issue Discount (OID), amortization, maturity, default, recovery and Internal Rate of Return (IRR).
On the third pass, read a BDC filing. Look for the same language in the investment schedule, accounting notes and management discussion. The vocabulary matters because each term changes what the lender owns, when cash arrives or what can be recovered.
The useful groupings
Price of the loan
The Secured Overnight Financing Rate (SOFR), spread and floor determine the stated floating cash coupon in a common private-credit structure. OID can add economic yield when a lender funds less than face value and later receives full principal.
Timing of cash
Cash interest arrives during the period. PIK adds to principal. Amortization returns some principal before maturity. None of those terms says whether the borrower will ultimately perform.
Position in trouble
First-lien and senior-secured language describes priority and collateral. Those protections can improve recovery prospects, but they do not guarantee full recovery. Collateral value can fall, documentation can contain weak protections and other claims can compete for value.
Evidence of stress
Non-accrual status usually means the lender has stopped recognizing contractual interest because collection is doubtful under its accounting policy. Recovery rate measures how much value comes back after default relative to the relevant claim.
Measuring the result
IRR incorporates the timing and amount of cash flows. It can be useful for a loan scenario, but an asset-level IRR is not the same as the return earned by a BDC shareholder.
What the score does not tell you
A perfect vocabulary score does not make a loan safe.
Terms must be read in context. A first-lien loan can sit against weak collateral. A high spread can compensate for risk or merely advertise it. PIK can be a planned feature or a sign that cash interest has become too heavy. A low reported non-accrual rate can coexist with loans that are still accruing but deteriorating.
The point of the deck is to make the next document easier to interrogate.
Key Terms
Business Development Company (BDC): A closed-end company that elects BDC status under the Investment Company Act of 1940, operates to invest in qualifying businesses, and makes managerial assistance available as the law requires.
Secured Overnight Financing Rate (SOFR): A broad measure of the cost of borrowing cash overnight using U.S. Treasury securities as collateral. Many floating-rate loans use a term version or related convention as a benchmark.
Payment-in-Kind (PIK): Interest added to the loan balance rather than paid in current cash.
Original Issue Discount (OID): The difference created when a debt instrument's issue price is below the amount due at maturity. For a performing loan, accounting rules generally recognize the discount over the instrument's life using an effective-yield method.
Internal Rate of Return (IRR): The annualized discount rate that equates modeled cash outflows and inflows in present-value terms.
Source Notes
The BDC definition follows Section 2(a)(48) and the election provisions of the Investment Company Act of 1940, with plain-language context from the U.S. Securities and Exchange Commission's investor bulletin. SOFR is defined using the Federal Reserve Bank of New York's official description. PIK, OID and non-accrual treatment are checked against current public BDC filings. The remaining loan terms follow their customary use in public credit agreements and BDC filings; actual definitions and accounting policies can differ by instrument and issuer. Always read the governing document.
Disclosure
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