Deck 9: Small Business Finance

Question 1

Since many businesses are not profitable in their first year, having a cash reserve with which to pay bills can help the business avoid insolvency.

Answer 1

True

Question 2

Most lenders are hesitant to make loans to startup businesses unless a wealthy friend or relative will cosign the loan.

Answer 2

True

Question 3

In most cases, the sheer strength of a business idea can win full funding for a venture.

Answer 3

False

Question 4

A lender may require a compensating balance, which means that the amount of funds is reduced, causing the rate of interest to increase, since the same amount of interest is paid and fewer funds are available.

Question 5

Ordinarily, the longer the maturity of the loan, the higher the rate of interest.

Question 6

The decision to seek outside funds, either through debt or equity, is relatively unimportant and simple.

Question 7

Simply having a good idea will not be enough to convince investors to risk their capital. A small business owner must also be able to show that he/she is a competent manager with previous business success.

Question 8

Two types of funds are available to the entrepreneur: debt and equity.

Question 9

Capital is a function of the applicant's personal financial strength.

Question 10

Each business must have its assets in place, which are all those things it needs to operate, before it ever opens its doors.

Question 11

A positive covenant spells out what a borrower cannot do when signing a loan agreement.

Question 12

Leverage can enable a small business owner to magnify the potential returns expected.

Question 13

T F Today, a credit score of 580-690 is necessary for an individual to obtain a business loan.

Question 14

The applicant's character is not a consideration when being evaluated by a lender.

Question 15

Until the debt is repaid, the creditor has a legal claim on a portion of the cash flows of the business.

Question 16

Commercial banks are the backbone of the credit market.

Question 17

The prime rate is defined as the rate of interest banks charge their "best" customers.

Question 18

Figure 9.1 is a pie chart that shows that about 30 percent of the companies listed on the Inc. 500 were started with less than $10,000.

Question 19

Assets owned by a loan applicant that can be pledged as security for the repayment of the loan constitute collateral.

Question 20

A fixed-rate loan typically has a higher interest rate than the initial rate on a variable-rate loan.

Question 21

The fundamental financial building blocks for an entrepreneur are knowing what assets are required to open the business and how those assets will be financed. This is known as

A) Financial management
B) Initial capital requirements
C) Managerial accounting
D) Open book management

Question 22

The 504 Loan Program provides small businesses with funding for fixed assets through a certified development company when conventional loans are not possible.

Question 23

Assets that will not be converted into cash within one year are called

A) Short-term assets
B) Long-term assets
C) Capital assets
D) Financial assets

Question 24

Venture capital firms rarely invest in high-tech industries.

Question 25

If a small business uses its receivables as collateral for a loan in the process known as pledging, the finance company will collect the accounts receivable.

Question 26

If a lender says no to a small business loan application, it is acceptable to ask whether the bank can rework the application so that it meets the lending criteria.

Question 27

A demand note allows the business to borrow and repay funds up to the maximum amount specified in the agreement throughout the year.

Question 28

Assets that will be converted into cash within one year are called

A) Short-term assets
B) Long-term assets
C) Capital assets
D) Financial assets

Question 29

Most lenders will expect entrepreneurs to provide equity funds in an amount of at least 35 percent of the business before approving the loan.

Question 30

Term insurance policies have no borrowing capacity.

Question 31

The process of determining initial capital requirements for a business begins with identifying

A) Long-term liabilities
B) Short-term and long-term equity
C) Short-term and long-term assets as well as expenses
D) Financing requirements

Question 32

About 40 percent of the plans submitted to venture capital firms are ultimately funded.

Question 33

Most new businesses are originally financed with the personal funds of the small business owner.

Question 34

According to a recent Wall Street Journal article, about one in 500 business owners will receive money from

A) Banks
B) The Small Business Administration
C) Angels
D) Venture capitalists

Question 35

The most active government lender is the Small Business Administration.

Question 36

Government lending programs exist to stimulate small businesses.

Question 37

Micromanagement angels own and operate their own business and are looking for ways to diversify their portfolios.

Question 38

Factoring has historically been viewed as one of the most desirable approaches to financing.

Question 39

Through the LowDoc loan program, a business needing a loan may borrow up to $25,000.

Question 40

Floor planning is a special type of a loan used for financing high-priced inventory like new cars and trucks.

Question 41

Equity funds never need to

A) Be repaid
B) Be accounted for
C) Be stated on the income statement
D) Be stated on the balance sheet

Question 42

The amount of money that a small business owner needs to borrow is the difference between the pro forma assets and

A) Projected sales
B) Projected expenses
C) Owner's equity
D) Project liabilities

Question 43

Building, equipment, land, and patents are which of the following?

A) Short-term assets
B) Long-term assets
C) Capital assets
D) Financial assets

Question 44

Two kinds of funds are potentially available to the entrepreneur:

A) Debit and credit
B) Financing and borrowing
C) Debt and equity
D) Liability and asset

Question 45

The general economic climate at the time of the loan application is which of the following five Cs of credit?

A) Capacity
B) Capital
C) Conditions
D) Character

Question 46

Debt creates the risk of becoming ___________ if the entrepreneur is unable to make each debt payment on time.

A) Profitable
B) Insolvent
C) Overextended
D) Successful

Question 47

If a small business owner needs to obtain a loan for purchasing inventory that is expected to sell within one year, the maturity of the loan should be

A) Short-term
B) Intermediate-term
C) Long-term
D) Perpetuity

Question 48

Providers of equity funds forego the opportunity to receive periodic repayments in order to share in

A) Sales
B) Profits
C) Revenues
D) Expenses

Question 49

The amount of money paid for the use of borrowed funds is known as

A) Interest
B) Principal
C) Maturity length
D) Debt

Question 50

A loan with an interest rate that changes over the life of the loan is known as a

A) Fixed rate loan
B) Variable rate loan
C) Balloon payment loan
D) Revolving loan

Question 51

Determining the applicant's ability to repay a loan by examining the amount of cash and marketable securities and the projected cash flows is which of following five Cs?

A) Capacity
B) Capital
C) Competency
D) Character

Question 52

All but which of the following are elements of the five Cs of credit?

A) Capacity
B) Capital
C) Competency
D) Character

Question 53

The ability to finance an investment through borrowed funds is known as

A) Equity
B) Leverage
C) Capital
D) Liabilities

Question 54

Interest rates for small business owners are normally made up of the ___________ plus an additional percentage.

A) Discount rate
B) Federal funds rate
C) Prime interest rate
D) Annual percentage rates

Question 55

When reviewing loan applications, Jessica, a loan officer at A+ Credit Union, always examines the amount of cash and marketable securities that applicants have on hand. She reviews historical, current, and projected cash flows of a business to gauge whether applicants are able to repay the loan. These activities best describe which of the five "Cs" of credit?

A) Capacity
B) Capital
C) Collateral
D) Character

Question 56

The more compounding periods, the __________ the effective rate of interest.

A) Lower
B) No effect on
C) Higher
D) Better

Question 57

The final step in defining required assets before opening a business involves

A) Evaluating fixed costs and other expenses
B) Subtracting the dollar value of the owner's equity from the total dollar value of the required assets
C) Evaluating the situation to determine exactly what has to be in place for the business to operate effectively
D) Determine financing requirements

Question 58

All but which of the following determines the size and extent of the obligation to the creditor?

A) Amount of principal borrowed
B) The loan's interest rate
C) The market interest rate
D) The loan's length of maturity

Question 59

Cash, inventory, and prepaid expenses are which of the following?

A) Short-term assets
B) Long-term assets
C) Capital assets
D) Financial assets

Question 60

An amount of money borrowed from a lender is known as the

A) Interest rate
B) Principal
C) Maturity length
D) Prime interest rate

Question 61

Wilma is ecstatic about the purchase of her first house. She has taken out a 30-year mortgage at a 5.25 percent interest rate, and her mortgage broker has informed her that the interest rate will not change for the life of the loan. What type of loan did Wilma take out?

A) Fixed-rate loan
B) Variable-rate loan
C) Equity loan
D) Long loan

Question 62

All but which of the following are the three primary factors that providers of equity financing are interested in?

A) Dividends
B) Voice in the management of the business
C) Increased value of the business
D) Payroll expense

Question 63

A type of business loan that is generally made for high-priced items like new automobiles or trucks, where the business holds the item in inventory and pays interest, and where the asset is still owned by the lender until it is sold, is known as which of the following?

A) An unsecured loan
B) Floor planning
C) A line of credit
D) A demand note

Question 64

An agreement that makes a specific amount of short-term funding available to a business as it is needed is called a/an

A) Unsecured loan
B) Secured loan
C) Line of credit
D) Demand note

Question 65

The length of time in which a loan must be repaid is called the

A) Principal
B) Interest rates
C) Maturity
D) Collateral

Question 66

_________ refers to the intervals at which interest is paid.

A) Collateral
B) Liquidity
C) Compounding
D) Securing

Question 67

The two types of loan endorsers are

A) Borrowers and guarantors
B) Guarantors and comakers
C) Borrowers and lenders
D) Comakers and borrowers

Question 68

Each year, Alexandra receives a payment for the stock she owns within the company where she is employed. The amount of the annual payment fluctuates based on the company's net profits. This is referred to as

A) An asset
B) A liability
C) A dividend
D) Equity

Question 69

The sale of common stock or the use of retained earnings to provide long-term financing is known as

A) Debt financing
B) Creative financing
C) Equity financing
D) Long-term financing

Question 70

Which type of loans are made to established businesses that have demonstrated a strong overall credit profile and have shown excellent creditworthiness and an extreme probability of repayment?

A) Balloon note
B) Floor planning
C) Installment loans
D) Unsecured term loans

Question 71

Upon obtaining a $100,000 business loan from his local bank, Arthur was informed that he must keep at least $10,000 on deposit with the bank. This is referred to as a/an

A) Effective rate of interest
B) Compensating balance
C) Required dividend
D) Maturity requirement

Question 72

__________ security refers to the borrower's assurance to lenders that loans will be repaid.

A) Loan
B) Note
C) Debt
D) Equity

Question 73

_____________ are the backbone of the credit market, offering the widest assortment of loans to creditworthy small businesses.

A) Credit unions
B) Savings and loans
C) Commercial banks
D) Venture capitalists

Question 74

Ralph just received a loan from his local bank, where he must make periodic payments that include accrued interest and part of the outstanding principal balance. Ralph's loan is known as a/an

A) Lateral loan
B) Unsecured loan
C) Secured loan
D) Installment loan

Question 75

A clause that requires the borrower to maintain a minimum level of working capital until the loan is repaid is known as

A) Covenants
B) Assurances
C) Endorsements
D) Guarantors

Question 76

A loan that requires the borrower to make small monthly payments that are usually enough to cover the interest, with the balance due at maturity is called a

A) Balloon note
B) Floor planning
C) Line of credit
D) Demand note

Question 77

All but which of the following are the most common types of loans provided by commercial finance companies?

A) Leasing
B) Floor planning
C) Balloon notes
D) Factoring accounts receivable

Question 78

A short-term loan where collateral is not required is called a/an

A) Unsecured loan
B) Secured loan
C) Line of credit
D) Demand note

Question 79

The rate of interest charged to a banks "best" customers is referred to as

A) Fixed rate
B) Dividend rate
C) Grade A rate
D) Prime rate

Question 80

A short-term loan where both principal and interest must be repaid in a lump sum at maturity is known as a/an

A) Unsecured loan
B) Secured loan
C) Line of credit
D) Demand note