💰 The Need for Capital
What is capital in a business context?
Money or assets invested to acquire resources for production/trade.
What is equity capital?
Money raised through issuing shares or owner’s investment.
Name two examples of current assets.
Cash, inventory, debtors.
Define short-term finance.
Funding needed for less than one year.
Which source of finance requires no repayment but reduces ownership control?
Equity capital.
Name the three main types of capital a business needs.
Start-up, Working, and Investment Capital.
Name two major sources of debt capital.
Commercial banks, bonds, or credit unions.
What happens if current liabilities exceed current assets?
Negative working capital—liquidity problems.
Give one example of short-term financing.
Trade credit, overdraft, or factoring.
Which capital is used to buy machinery or expand production?
Investment capital.
What is venture capital and who provides it?
Funds invested in high-potential businesses by venture capitalists in exchange for equity.
What is the main difference between equity and debt finance?
Equity = ownership & dividends; Debt = borrowed money with interest.
List two ways a firm can manage debtors effectively.
Offer discounts or reduce credit period/limit.
What is the difference between hire purchase and leasing?
Hire purchase leads to ownership; leasing does not.
Which financing method allows you to use an asset without owning it?
Leasing.
State one advantage and one reason for using venture capital.
Advantage: No interest payments. Reason: To fund start-ups or expansion.
What is a debenture and how is it secured?
A long-term loan secured against company assets.
What is debt factoring?
Selling accounts receivable (debtors) to a finance company for immediate cash.
What is gearing, and what does it indicate?
Ratio of loan capital to equity capital; indicates financial risk.
If a firm sells excess inventory to generate cash, which type of capital is it increasing?
Working capital.
What does “working capital” measure, and how is it calculated?
It measures liquidity and ability to meet short-term debts. Formula: Current Assets – Current Liabilities.
Give one advantage and one disadvantage of using equity capital.
Advantage: No repayment needed. Disadvantage: Ownership is shared.
What is the “cost of holding too much cash”?
Loss of purchasing power, interest, or opportunity cost.
Name two factors to consider before choosing a source of finance.
Cost (interest), purpose, firm size, stability, or gearing.
A firm has high loan capital compared to share capital. What is it called?
Highly geared.