Deck 9: Commercial Lending

Question 1

Short-term loans are always for small amounts of money.

Answer 1

False

Question 2

Unlike consumer lending, most commercial lending is regulated only by the terms of the loan agreement and some state laws.

Answer 2

True

Question 3

Contract financing is secured by the value of a specific contract.

Answer 3

True

Question 4

Manufacturers build items to sell to merchandisers.

Question 5

A form of asset-based lending that advances cash to a business in exchange for its receivables is called

A)a line of credit.
B)leasing.
C) a bridge loan.
D) factoring.

Question 6

Almost no business can exist without financing debt.

Question 7

Commercial lending practices can apply to individuals as well as businesses.

Question 8

Equipment loans are often tied to all of the following except

A)the equipment itself.
B)the financial position of the borrower.
C) redevelopment of the business's real estate.
D) the business's overall cash flow.

Question 9

Debt ÷ Income =

A)debt ratio.
B)debt service coverage ratio.
C) LTV ratio.
D) income ratio.

Question 10

Which of the following would a business probably NOT finance by a term loan?

A)real estate
B)equipment
C) increasing inventory
D) business expansion

Question 11

Recent history has proven that financial markets can effectively self-regulate.

Question 12

The government supports more than a billion dollars in loans each year to American businesses through the Small Business Administration.

Question 13

A high DSCR indicates that a company has

A)barely any operating income available for debt service.
B)taken on more debt than it has operating income.
C) a good bit of operating income available for debt service.
D) a negative cash flow.

Question 14

Charitable organizations are not eligible for SBA loan guaranties.

Question 15

Which of the following is an approved use of an SBA-backed loan?

A)to pay delinquent taxes
B)to purchase new equipment
C) to pay existing debt
D) to finance floor plan needs

Question 16

Merchandisers sell goods or services.

Question 17

It is more difficult for lenders to evaluate business loan applications than consumer loan applications.

Question 18

Which of the following type of business loan is often packaged with a real estate loan?

A)equipment loan
B)construction loan
C) operations loan
D) automobile loan

Question 19

Which of the following types of lending accounts for the largest dollar market?

A)commercial lending
B)consumer lending
C) mortgage lending
D) government lending

Question 20

Most short-term business loans are for

A)six months or less.
B)one year or less.
C) two years or less.
D) five years or less.

Question 21

Many banks offer ____________________ loans to meet the inventory financing needs of small and mid-sized businesses. These types of loans include flexible credit limits to accommodate seasonal needs.

Question 22

The XYZ Company has debt of $500,000 and income of $2.5 million. Find the debt ratio for the XYZ Company (expressed as a percentage).

Question 23

Products that lack an underlying value in their assets are called __________________________.

Question 24

An underwriter has the following data for a company: monthly income: $9,000; monthly debt: $5,000; loan principal: $40,000; market value: $70,000; gross income: $175,000. Use this data to find the loan-to-value ratio (expressed as a percentage).

Question 25

The ____________________ ratio is the principal amount of the loan divided by the value of the securing property.

Question 26

A(n) ____________________ loan is a particular form of short-term loan used to cover expenses until long-term financing is in place.

Question 27

Net ____________________ income is gross income minus expenses, taxes, insurance, utilities, and so forth.

Question 28

________________ occurs when people make investments based on anticipated or hoped-for outcomes, without having an ownership stake in the asset being insured.

Question 29

Milford Manufacturing Company has a debt ratio of 60 percent. If the company's debt is $300,000, find the company's income.

Question 30

A business loan that finances working capital would probably be a(n) ____________________ loan.

Question 31

The Small Business Administration (SBA) ____________________ program is the SBA's most popular loan program and the foundation of the agency.

Question 32

Which of the following is a merchandising business?

A)automobile factory
B)coal mine
C) ice-cream shop
D) steel mill

Question 33

The ____________________conducts an annual survey of national banks to determine trends in lending standards and credit risks as reflected in underwriting practices.

Question 34

How do commercial real estate requirements differ from requirements for private residential mortgages?

Question 35

Find the debt service coverage ratio if gross income is $740,000; net operating income is $444,000; and total cost of debt is $400,000.

Question 36

The greatest start-up cost of new businesses is often ____________________.

Question 37

The SBA's ____________________ program consists of about 40 for-profit corporations that raise and distribute venture capital to promising businesses.

Question 38

Lending to business enterprises is called ____________________ lending.

Question 39

A company's ____________________ ratio is the total obligations compared to the total income.

Question 40

Assume that gross income is $1.5 million; total cost of debt is $600,000; and the debt service coverage ratio is 1.5. Find net operating income.

Question 41

How do lines of credit work for a business? How are they often used?

Question 42

List at least five advantages a business gains by leasing rather than purchasing equipment.

Question 43

What is depreciation?

Question 44

What kind of loan-to-value ratio do commercial lenders want to see when considering a business's mortgage application?

Question 45

Name two factors regarding the building itself that underwriters must assess in order to determine whether a business construction loan is sound.

Question 46

Describe the investment strategy of a risk preferrer.

Question 47

Briefly explain the SBA Microloan program.

Question 48

Businesses frequently need loans to help with cash flow problems. Briefly explain the best time for a business to obtain such a loan.

Question 49

Name at least four financial records or documents a lender will typically examine when a business applies for a loan, including one that applies to small businesses only.

Question 50

What is the debt service coverage ratio (DSCR)? What kind of DSCR is desirable-high or low? Why? What is indicated by a DSCR of less than 1.0?