What is loan capital?

• A. Grants from government
• B. Money borrowed that must be repaid with interest
• C. Equity capital from investors
• D. Retained profits

Answer: (B)

Loan capital is money borrowed from lenders that must be repaid over time, usually with interest. It represents debt financing: the business receives funds now and agrees to pay back the principal plus interest according to a set schedule. The interest reflects the cost of borrowing and compensates the lender for risk and the time value of money. Because it’s debt, taking on loan capital does not dilute ownership or control of the business, unlike issuing equity. This differs from government grants (which don’t have to be repaid), from equity capital (which means selling ownership stakes), and from retained profits (funds reinvested from earnings, not borrowed). Loan capital is a tool to finance purchases, expansion, or working capital, with the obligation of regular repayments that affect cash flow.