Chapter 29: Business Finance

Question 1

Define start up capital

Answer 1

Start-up capital: the capital needed by an entrepreneur to set up a business.

Question 2

Define working capital

Answer 2

Working capital: the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms working capital = current assets – current liabilities.

Question 3

Define liquidity

Answer 3

Liquidity: the ability of a firm to be able to pay its short- term debts.

Question 4

Define Liquidation

Answer 4

Liquidation: when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.

Question 5

Define capital expenditure

Answer 5

Capital expenditure: the purchase of assets that are expected to last for more than one year, such as building and machinery.

Question 6

Define revenue expenditure

Answer 6

Revenue expenditure: spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock.

Question 7

Define overdraft

Answer 7

Overdraft: bank agrees to a business borrowing up to an agreed limit as and when required.

Question 8

Define factoring

Answer 8

Factoring: selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – only a proportion of the value of the debts will be received as cash.

Question 9

Define hire purchasing

Answer 9

Hire purchase: an asset is sold to a company that agrees to pay fixed repayments over an agreed time period – the asset belongs to the company.

Question 10

Define leasing

Answer 10

Leasing: obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period, this avoids the need for the business to raise long-term capital to buy the asset; ownership remains with the leasing company.

Question 11

Define equity finance

Answer 11

Equity finance: permanent finance raised by companies through the sale of shares.

Question 12

Define long term loan

Answer 12

Long-term loans: loans that do not have to be repaid for at least one year.

Question 13

Define long term bonds or debentures

Answer 13

Long-term bonds or debentures: bonds issued by companies to raise debt finance, often with a fixed rate of interest.

Question 14

Define rights issue

Answer 14

Rights issue: existing shareholders are given the right to buy additional shares at a discounted price.

Question 15

Define venture capital

Answer 15

Venture capital: risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources.

Question 16

Define crowd funding

Answer 16

Crowd funding: the use of small amounts of capital from a large number of individuals to finance a new business venture.

Question 17

Define micro-finance

Answer 17

Micro-finance: providing financial services for poor and low-income customers who do not have access to banking services, such as loans and overdrafts offered by traditional commercial banks

Question 18

Define business plan

Answer 18

Business plan: a detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business.