Chapter 14 - Small Business Finance: Equity, Debt, and Gifts
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
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 investment
foundation
an institution to which private wealth is contributed and from which private wealth is distributed for public purposes
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 it you don't make your payments, you car will be repossessed
quite 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 or 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
gift
valuable assets or services to the business without any obligation to repay or give up any ownership interest
microlender
SBA approved partners who offer SB guaranteed micro loans to eligible small businesses; these loans require much less paperwork than regular SBA or bank loans, and are for amounts under $50,000
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 specified geographic area
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."
debt capital
money borrowed for the purposes of investment in a business
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
financial risk
uncertainty of returns; the probability of losing money
bootstrapping
using low cost or free techniques to minimize your cost of doing business
Fair Credit Reporting Act
US federal legislation specifying consumers' rights vis-a-vis credit reporting agencies
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
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 SEX 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."
gift capital
capital resources that neither provide any ownership nor require any repayment to the giver
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
weighted average cost of capital (WAC)
the expected average future cost of funds
risk
the level or profitability 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 ration of debt to equity that provides the maximum level of profits
diversify
to invest in multiple investments of differing risk for the purpose of reducing overall investment risk
partnership
two or more people cooperating to conduct a business enterprise