Chapter 14: Small Business Finance - Using Equity, Debt, and Gifts

Microlender

SBA approve partners who offer SBA-guaranteed microloans to eligible small business. These loans require much less paperwork than regular SBA or bank loans, and are for amounts under $50,000

Fair credit reporting act (FCRA)

U.S. federal legislation specifying consumer's rights vis-à-vis credit reporting agencies

Credit reporting agency (CRA)

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

Corporation

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

Limited Liability Company (LLC)

a legal form of business organization that is created by filing required documentation with a state government

Debt

a legal obligation to pay money in the future

Tax abatement

a legal reduction in taxes by a government

Financial leverage

a measure of the amount of debt relative to owner investment

Royalty financing

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

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

Foundation

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

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

Accelerator

an organization that supports start-up technology businesses by providing inexpensive office space, a variety of support services, and resources

Accredited investor

as defined by the SEC in Title 17, Chapter II, Part 230, §230.501 of the Code of Federal Regulations (CFR): "Any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to the person: banks, business development companies, companies worth more than $5 million, an executive of the firm making the offering, or an individual with a personal net worth of more than $1 million." You may access the regulation online

Sophisticated investor

as defined by the SEC, 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."

Interest

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

Tax credit

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

Grant

gifts of money made to a business for a specific purpose

Unsecured debt

loans that do not allow the lender to seize assets in event of non-payment

Secured debt

loans that provide the lender with the legal right to seize specific assets in the event of nonpayment. Most automobile loans are secured debt and if you don't make your payments your car will be repossessed

Debt Capital

money borrowed for the purposes of investment in a business

Equity capital (or equity)

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

Outside equity

money from selling part of your business to people who are not and will not be involved in the management of the business

Dividends

payments of profits to the owners of corporations

Small business investment company (SBIC)

private businesses that are authorized to make SBA insured loans to startup and small businesses

Harvest

recover value through sale of a firm or profits

Software as a Service (SaaS)

refers to an Internet-based program that you would use in work or leisure. These are paid for by a time-frame, project of some measurement of usage

Collateral

something of value given or pledged as security for payment of a loan

Profit, profitability

the amount that revenues exceed expenses

Weighted average cost of capital (WAC)

the expected average future cost of funds

Risk

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

Gain on investment

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

Cost of capital

the percentage cost of obtaining future funds

Optimum capital structure

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

Diversify

to invest in multiple investments of differing risk profiles for the purpose of reducing over-all investment risk

Partnership

two or more people cooperating to conduct a business enterprise

Financial risk

uncertainty of returns, the probability of losing money

Bootstrapping

using funds generated by business operations to capitalize growth

Gift capital (or gift)

valuable assets or services donated to the business without any obligation to repay or any ownership interest