CH 14 Key Terms

credit reporting agency (CRA)

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

interest

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

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. LLCs have a choice, under federal tax law, of being taxed as either corporations or partnerships.

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 total 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-ups, typically of a particular type (e.g., Internet, biotech, fashion, sports, women-owned firms, etc.) with a financial investment, free or inexpensive office space, mentoring, a variety of free or low-cost support services, and other resources. The goal of an accelerator is to accelerate a start-up from its early stages to being ready to pitch for investment. Most accelerators take an equity stake in the companies they help.

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 that 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."

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."

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.

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

Money contributed to the businesses in return for part 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 business that is authorized to make SBA-insured loans to start-ups and small businesses.

harvest

Recover value through a sale of a firm or its assets.

microlender

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.

SaaS

SaaS stands for Software as a Service and refers to an Internet-based program that you would use in work or leisure. These are paid for by time frame, project, or some measure of usage.

collateral

Something of value given or pledged as security for payment of a loan; collateral may consist of financial instruments, such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings.

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 overall investment risk.

partnership

Two or more people cooperating to conduct a business enterprise.

Fair Credit Reporting Act (FCRA)

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

financial risk

Uncertainty of returns; the probability of losing money.

bootstrapping

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

gift

Valuable assets or services donated to the business without any obligation to repay or give up any ownership interest.