Deck 11: Franchising

Question 1

History suggests a favourable credit environment will rarely change, and if it does the change will be gradual.

Answer 1

False

Question 2

Time-sales financing is a way for a seller of obtaining long-term from short-term instalment accounts receivable.

Answer 2

False

Question 3

Unlike equity investors, banks place very little weight on the quality of the venture team.

Answer 3

False

Question 4

If a loan exceeds the limits of a local bank, part, or all, of the loan amount may be offered to correspondent banks in neighbouring communities and nearby financial centres.

Question 5

Loans made to finance improvements to business properties and plants are called plant improvement loans.

Question 6

The primary reason banks are lower-risk lenders is because that profile is consistent with their management style.

Question 7

In hard times, banks have been known to call their best loans first.

Question 8

Banks will lend to a start-up if the lead entrepreneur has a track record and is well connected in the local area.

Question 9

Because banks may earn as little as one percent on net profit total assets, they are especially sensitive to the possibility of a loss.

Question 10

Because of the economic crash of 2008, lenders have recently become wary capital providers.

Question 11

Factoring is accomplished on a discounted value of the receivables pledged.

Question 12

Personal property is any machinery, equipment, or business property that is made the collateral of a loan.

Question 13

Owners of creditworthy companies with excellent records for timely repayment of interest and principal do not have to provide personal guarantees.

Question 14

Banks expect a borrower to pay off his or her open loan within a year and hold a zero balance for one to two months. This is known as "cleaning up".

Question 15

To keep trade credit open, the full balance must be periodically paid off.

Question 16

Under time-sales financing, the bank purchases instalment contracts at a discount from their full value and takes as security an assignment of the manufacturer/dealer's interest in the conditional sales contract.

Question 17

In a standard factoring arrangement, the factor buys the client's receivables outright, without recourse, as soon as the client creates them, by shipment of goods to customers.

Question 18

Resting the line is a formal or informal agreement between a bank and a borrower concerning the maximum loan a bank will allow the borrower for a one-year period.

Question 19

The availability of credit is cyclical.

Question 20

Commercial finance companies lend against the liquidation value of assets.

Question 21

The use of line of credit funds is more common in some industries than in others.

Question 22

Factoring is a cheap method for turning receivables into cash.

Question 23

Work on building a relationship with the banker, not the bank.

Question 24

A sales contract is financed by a bank that has recourse to the seller should the purchaser default on the loan.

Question 25

Term lenders stress the entrepreneurial and managerial abilities of the borrowing company.

Question 26

Finance companies do not require prepayment penalties.

Question 27

Trade creditors sometimes regard factoring as evidence of a company in financial difficulty.

Question 28

"Resting the line" occurs when a bank cancels a line of credit to a customer.

Question 29

Lines of credit must be secured by a pledge of inventory, receivables, equipment, or other acceptable assets.

Question 30

In Canada, government programs are the primary source of debt capital for existing (not new) businesses.

Question 31

"Cleaning up" a line of credit means paying the line down to zero and holding a zero balance for one or two months.

Question 32

Leasing provides the flexibility of returning equipment after the lease period if it is no longer needed-but not if that equipment has become technologically obsolete.

Question 33

A factor assumes the credit risk, does the credit investigations and collections, and advances funds.

Question 34

A bank's financing of instalment note receivables is a non-recourse contract with the seller.

Question 35

The entrepreneur-borrower should regard his or her contacts with the bank as a sales mission.

Question 36

Leasing credit criteria are very similar to the criteria used by commercial banks for equipment loans.

Question 37

Time-sales finance is a way of obtaining short-term financing from long-term instalment accounts receivable.

Question 38

Finance companies install measure in their agreements that help insure that they will not be immediately replaced by banks when a borrower's credit profile improves.

Question 39

Leasing enables a company to conserve cash and reduce its requirements for equity capital.

Question 40

One way to acquire financing on existing equipment is to sell that equipment back to the dealer and then repurchase it under a payment contract.

Question 41

What business frequently lends money to companies that do not have positive cash flow?

A) Commercial banks
B) Suppliers
C) Leasing companies
D) Factors
E) Commercial finance companies

Question 42

Leverage improves present value, and decreases risk.

Question 43

What is the advantage of dealing with a commercial finance company?

A) Better rates
B) No prepayment penalties
C) Flexibility with lending arrangements
D) Short commitment time frame
E) Uncollateralized loans

Question 44

Traditionally, loan officers might have had up to several million dollars of lending authority and could make loans to small companies.

Question 45

Which of the following secures a bank's interest in a time-sales finance contract?

A) The payment obligation of the equipment purchaser
B) The dealer's security interest in the equipment purchased
C) Recourse to the manufacturer in the event of default
D) All of the answers are correct
E) The payment obligation of the equipment purchaser and recourse to the manufacturer in the event of default

Question 46

What is the primary source of debt capital for existing businesses?

A) Commercial banks
B) Government programs
C) Finance companies
D) Factors
E) Trade credit

Question 47

Leverage creates an unforgiving capital structure, but the potential additional ROI is often worth the risk.

Question 48

In tight economies, which of the following is most accepting of risk?

A) Leasing companies
B) Factors
C) Suppliers
D) Commercial banks
E) Commercial finance companies

Question 49

ROE stands for return on equity.

Question 50

A bank may inform the purchaser of goods that the account has been assigned to the bank, and payments are made directly to the bank, which credits them to the borrower's account. This is called:

A) Asset financing
B) A credit plan
C) An assignment
D) A notification plan
E) A credit report

Question 51

In which of the following industries has factoring not become a common financial instrument?

A) Textiles
B) Furniture manufacturing
C) Plastics
D) Toys
E) Factoring is common in All of the answers are correct industries

Question 52

Borrow only when you need it.

Question 53

Modern corporate financial theory preaches the virtues of zero cash balances and the use of leverage to enhance return on equity.

Question 54

Favourable lending decisions depend in large part on an entrepreneur's ability to sell and to develop a good relationship with the loan officer.

Question 55

Less and less are loan decisions made by loan committees.

Question 56

Trade credit is reflected as what on the balance sheet?

A) Accounts receivable
B) Accounts payable
C) Notes outstanding
D) Goodwill
E) None of the answers are correct

Question 57

The risk averse nature of commercial lending institutions is consistent with their:

A) Management structure
B) Expertise
C) Profit margins
D) Legal responsibilities to depositors
E) Obligations to shareholders

Question 58

A company's creditworthiness as determined by analysis of its past results via the balance sheet, income statement, and cash flow.

Question 59

To build credibility with bankers, entrepreneurs should borrow before they need to and then repay the loan.

Question 60

A significant change in today's lending environment is the centralized lending decision.

Question 61

How can leasing provide tax advantages?

Question 62

Identify three primary sources of borrowed capital for new and young businesses.

Question 63

For new and young businesses, lenders do not like to see total debt-to-equity ratios greater than

A) 1
B) 1.1
C) 1.2
D) 1.5
E) 2.0

Question 64

With regard to personal guarantees, what is meant by "joint and severable"?

Question 65

Which of the following can provide tax advantages?

A) Commercial loan
B) Factoring
C) Lines of credit
D) Leasing
E) Conditional sales contracts

Question 66

What are the three distinguishing features of term loans?

Question 67

What should an entrepreneur look for when seeking to develop a constructive banking relationship?

Question 68

Why do start-ups have more difficult time borrowing money than existing businesses?

Question 69

When should you expect personal guarantees and loans?

Question 70

Discuss how an entrepreneur can build a good working relationship with his or her banker.

Question 71

Which of the following is generally the most expensive source of financing?

A) Factoring
B) Commercial banks
C) Commercial finance companies
D) Business Development Canada
E) Suppliers

Question 72

Which of the following is the most important consideration when seeking bank debt?

A) The reputation of the bank
B) The terms
C) The size of the loan
D) The contact at the bank
E) The covenants