This article on Business Finance Source Definitions was created to support many of the entrepreneurs we speak to who are unclear about the different terminologies. Understanding the language and terminologies of the business finance world is just part of the challenge of entrepreneurs seeking business finance.
Business Finance Source Definitions
Seed capital: capital required to fund a business project before the product or service is marketed. Seed capital is often pivotal in high-tech projects to allow businesspersons to conduct surveys as well as research and development on prototypes that will become companies’ core business.
Venture (or risk) capital: equity invested temporarily in the form of shares of a company by a specialised firm in the hope of a return on investment (ROI) that is both large and speedy, on a par with the level of risk taken. Venture capital firms invest both in start-ups and growing businesses.
Business angels (informal venture capital): private individuals who invest part of their estate in start-ups in the form of venture capital and also contribute their personal managerial expertise.
Business Angels Networks (BANs): standing regional platforms that promote the matching of business angels with potential investees.
Early stage (or start-up) finance: equity invested in businesses that are past research and development but need additional funding to market their products and services.
Further Business Finance Source Definitions
Mezzanine: combination of equity and loans. Applicable interest rates are often comparatively high.
Financial package: a combination of different funding sources.
Corporate venturing: venture capital invested by existing firms for the purpose of funding innovative businesses set up by their own staff or active in industries considered of strategic importance.
Grants: subsidies paid—without an obligation to refund—by public authorities to companies investing in a region for the purpose of facilitating their establishment or expansion.
Factoring: a technique whereby SMEs sell invoices to specialised firms.
Leasing: hire-purchase of capital goods.
Loans and debt: the main sources of funding for SMEs.
Private Equity Investment: Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilised to fund new technology, make acquisitions, expand working capital, and too bolster and solidify a balance sheet.
Related Corporate Finance Terminologies and Definitions:
- Capital Budgeting:
- Meaning: The process of evaluating and selecting long-term investment projects, such as the acquisition of new equipment or the launch of a new product, to ensure they align with the company’s strategic goals.
- Cost of Capital:
- Meaning: The overall rate of return required by investors to provide capital to a company. It is a blend of the cost of debt and the cost of equity.
- WACC (Weighted Average Cost of Capital):
- Meaning: A calculation that reflects the average cost of financing a company’s assets, taking into account the relative weights of debt and equity in the capital structure.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):
- Meaning: A measure of a company’s operating performance, calculated by adding back interest, taxes, depreciation, and amortization to net income.
- Leverage:
- Meaning: The use of various financial instruments or borrowed capital to increase the potential return of an investment. It can refer to both financial leverage (using debt) and operating leverage (using fixed costs).
- Dividend:
- Meaning: A distribution of a portion of a company’s earnings to its shareholders, usually in the form of cash or additional shares.
- ROI (Return on Investment):
- Meaning: A performance measure used to evaluate the efficiency or profitability of an investment. It is calculated by dividing the net gain from the investment by the initial cost.
- IPO (Initial Public Offering):
- Meaning: The first sale of a company’s stock to the public. It marks the transition from a privately held company to a publicly traded one.
- Mergers and Acquisitions (M&A):
- Meaning: The process of combining two or more companies through various types of financial transactions, such as mergers, acquisitions, consolidations, or tender offers.
- Hedging:
- Meaning: A risk management strategy used to offset or limit potential losses from adverse price movements in financial instruments by taking an offsetting position in a related security.
- Liquidity:
- Meaning: The ease with which an asset can be converted into cash or a liability settled. High liquidity indicates that assets can be quickly bought or sold with minimal price changes.
- Working Capital:
- Meaning: The difference between a company’s current assets and current liabilities. It represents the funds available for the day-to-day operations of the business.
- Debenture:
- Meaning: A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.
- Financial Statement:
- Meaning: A formal record of the financial activities and position of a business, typically including the balance sheet, income statement, and cash flow statement.
- Derivative:
- Meaning: A financial contract whose value is derived from the performance of an underlying asset, index, or rate. Common derivatives include options and futures contracts.
The Caban Group have built ups significant infrastructure of service providers who support entrepreneurs with access to business finance, support with restructuring, access to grant funding and support in improving cashflow challenges. Contact the team at Caban through the contact form on the website or by emailing Info @ Caban.co.za
