Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

Capital, as one of the five Cs of credit, is defined as what?

1. Borrower's financial net worth

2. Total assets of the business

3. Outstanding debts of the borrower

4. Annual revenue of the business

The correct answer is: Borrower's financial net worth

Capital, as one of the five Cs of credit, refers specifically to the borrower's financial net worth. It represents the amount of wealth the borrower owns, which can act as a buffer for lenders. This net worth is crucial because it indicates the borrower’s ability to absorb losses and repay the loan. When evaluating a potential borrower, lenders will look at capital to assess how much personal investment the borrower has made into the business, which can suggest their commitment and reliability. A higher financial net worth often correlates with lower risk for the lender, making it an essential component of credit assessments. The other options, while relevant to a business’s financial evaluation, do not define capital in the context of the five Cs of credit. The total assets of the business, outstanding debts, and annual revenue are all important financial metrics, but they do not directly represent the net worth, which is calculated as assets minus liabilities. Therefore, the definition of capital is best captured by the borrower's financial net worth.