Essential Business Finance Terminology Explained
Posted on Mar 31, 2025 in Economy
Key Business Finance Terms Defined
- Business Angels
- Wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential.
- Capital Expenditure
- Investment spending on fixed assets such as the purchase of land and buildings.
- Debt Factoring
- A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.
- External Sources of Finance
- Getting funds from outside the organization, e.g., through debt (overdrafts, loans, and debentures), share capital, or the government.
- Grants
- Government financial gifts to support business activities. They are not expected to be repaid by the recipient.
- Initial Public Offering (IPO)
- Refers to a business converting its legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time.
- Internal Sources of Finance
- Getting funds from within the organization, e.g., through personal funds, retained profits, and the sale of assets.
- Leasing
- A form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.
- Loan Capital
- Refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans, and debentures.
- Overdrafts
- Allow a business to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing in the short term.
- Retained Profit
- The value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders.
- Revenue Expenditure
- Refers to spending on the day-to-day running of a business, such as rent, wages, and utility bills.
- Sale-and-Leaseback
- A source of external finance involving a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back. In essence, the lessee transfers ownership to the lessor, but the asset does not physically leave the business.
- Share Capital
- The money raised from selling shares in a limited liability company, from its initial public offering (IPO) and any subsequent share issues.
- Share Issue
- (Also known as a share placement) Exists when an existing public limited company raises further finance by selling more of its shares.
- Sources of Finance
- The general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans, and government grants.
- Subsidies
- Funded by the government to lower a firm’s production costs as output provides extended benefits to society, e.g., farmers are often provided with subsidies to stabilize food prices.
- Trade Credit
- Allows a business to ‘buy now and pay later’. The credit provider does not receive any cash from the buyer until a later date (usually allowed between 30-60 days).
- Venture Capital
- High-risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or shares in the business venture.
