Ch 14- Small business finance: Using equity, debt, and gifts

interest

a charge for the use of money, usually figured as a percentage of the principal

debt

a legal obligation to pay money in the future

secured debt

loans that provide the lender with the legal right to seize specific assets in the event of nonpayment. Ex: car loans- if you don't make your payments, your car will be repossessed

True

(T/F) Outside equity is money raised from selling part of your business to people who are not and will not be involved in the management of the business.

angel investor

A wealthy individual who invests in relatively early stages of development:

equity capital

Money contributed to the business in return for part ownership of the business is __________________.

outside equity investors

People who buy ownership rights in your business are considered______

return on equity

The ratio of profits to owner investment in a business:

fair credit reporting act (FCRA)

US federal legislation specifying consumer's rights vis-à-vis credit reporting agencies

bootstrapping

Using one's own capital and funds generated by business operations to finance growth is

Limited Liability Company

What is an LLC?

economic development

When a business succeeds and grows, it contributes to the ______ of an area

owner character

_____ is judged largely by the owner's personal credit rating and by that of the business

tax abatement

a legal reduction in taxes by a government

financial leverage

a measure of the amount of debt relative to total investment

foundation

an institution to which private wealth is contributed and from which private wealth is distributed for

accelerator

an organization that supports start-ups, typically of a particular type, with a financial investment, free or inexpensive office space, etc.

gift capital

capital resources that neither provide any ownership nor require any repayment to the giver

tax credit

direct reduction in the amount of taxes that must be paid, dependent on meeting some legal criteria

grant

gift of money made to a business for a specific purpose

unsecured debt

loans that do not allow a lender to seize specific assets in the event of nonpayment

dividens

payment of profits to the owners of corporations

harvest

recover value through a sale of a firm or its assets

collateral

something of value given or pledged as security for payment of a loan; collateral may consist of financial instruments

risk

the level of probability than an investment will not produce expected gains

partnership

two or more people cooperating to conduct a business enterprise

bootstrapping

using low-cost or free techniques to minimize your cost of doing business

growth potential

_______ is the primary concern for equity investors

financial management

a set of theories and techniques used to optimize the receipt and use of capital assets

angel investor

a wealthy individual who invests in companies in relatively early stages of development

community development organization

an organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area

sophisticated investor

people who have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment

small business investment company (SBIC)

private business that is authorized to make SBA-insured loans to start-ups and small businesses

optimum capital structure

the ratio of debt to equity that provides the maximum level of profits

royalty financing

a method of raising capital financing where investors provide money to a business in return for a guaranteed percentage of revenues

microlenders

SBA-approved partner that offers SBA-guaranteed microloans to eligible small businesses. These loans require much less paperwork than regular SBA or bank loans, and are for amounts under $50,000

corporation

a legal "artificial" entity that is formed by filing specific documents with a state government

debt capital

money borrowed for the purposes of investment in a business

limited liability company (LLC)

a legal form of business organization that is created by filing required documentation with a state government. They have a choice, under federal tax law, of being taxed as either corporations or partnerships

diversify

to invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risk

cost of capital

the percentage cost of obtaining future funds

gift

valuable assets or services to the business without any obligation to repay or give up amy ownership interest

profitability

the amount that revenues exceed expenses

credit reporting agency (CRA)

a business that collects, collates, and reports information concerning an entity's use of debt

equity capital

money contributed to the business in return for part ownership of the business

weighted average cost of capital (WAC)

the expected average future cost of funds

gain on investment

the percentage amount that the payout of an investment differs from the original cost calculated as: (payout - investment + dividends) / investment