Which description most accurately defines debt capital?

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Prepare for the AAMI Small Business Management Test with flashcards and multiple choice questions; each question comes with hints and explanations. Get exam ready!

Multiple Choice

Which description most accurately defines debt capital?

Explanation:
Debt capital is funds a business borrows from external sources that must be repaid, usually with interest. This type of financing creates a liability on the balance sheet and funds operations or growth without giving up ownership. The description that fits best is borrowed or loaned capital invested in the business that must be repaid to creditors. In contrast, equity obtained from owners represents ownership stake rather than a repayment obligation. Revenue from sales is income, not capital, and retained earnings reinvested in the company come from profits and increase equity, not debt.

Debt capital is funds a business borrows from external sources that must be repaid, usually with interest. This type of financing creates a liability on the balance sheet and funds operations or growth without giving up ownership. The description that fits best is borrowed or loaned capital invested in the business that must be repaid to creditors. In contrast, equity obtained from owners represents ownership stake rather than a repayment obligation. Revenue from sales is income, not capital, and retained earnings reinvested in the company come from profits and increase equity, not debt.

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