Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

What is the phrase that describes capacity in relation to the ability to repay debt?

1. Potential income from future investments

2. Ability to repay the debt from ongoing business operations

3. Strength of business relationships and networks

4. Total assets available for liquidation

The correct answer is: Ability to repay the debt from ongoing business operations

The phrase that describes capacity in relation to the ability to repay debt is rooted in the ability of a company to generate enough income from its ongoing operations to meet its financial obligations. When evaluating a business's capacity, lenders and investors consider how well the company can cover its debts using its current income streams, rather than relying solely on assets or potential future earnings. This understanding is crucial because it ensures that the business can sustainably make payments on its debts while continuing its operations. The concept of capacity directly ties to cash flow, profitability, and the efficiency of operations—all of which demonstrate the firm's financial health and its ability to manage and repay loans over time.