Deck 9: Small Business Finance

Question 1

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

Answer 1

A

Question 2

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 "C's" of credit?

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

Answer 2

A

Question 3

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 C's?

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

Answer 3

A

Question 4

The fundamental financial building blocks for a small business owner 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 5

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

A) equity
B) leverage
C) capital
D) liabilities

Question 6

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 7

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 8

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 9

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 10

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 11

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 12

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 13

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 14

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 15

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 16

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

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

Question 17

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

A) interest
B) principal
C) maturity length
D) debt

Question 18

Those who rarely invest in retail operations but instead focus on high technology and growth industries (also essential services) are ______.

A) banks
B) the Small Business Administration
C) angels
D) venture capitalists

Question 19

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 20

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 21

The two types of loan endorsers are ______.

A) borrowers and guarantors
B) guarantors and comakers
C) borrowers and lenders
D) comakers and borrowers

Question 22

______ 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 23

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 24

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 25

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 26

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 27

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 28

The rate of interest charged to a bank's "best" customers is referred to as ______.

A) fixed rate
B) dividend rate
C) grade A rate
D) prime rate

Question 29

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 30

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 31

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

A) lower
B) no effect on
C) higher
D) better

Question 32

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 33

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 34

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 35

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

A) principal
B) interest rates
C) maturity
D) collateral

Question 36

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

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

Question 37

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 38

______ refers to the intervals at which interest is paid.

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

Question 39

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

Question 40

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 41

The first place most entrepreneurs find equity capital is ______.

A) partners
B) community investors
C) venture capital firms
D) in their personal assets

Question 42

A finance company will generally purchase the accounts receivable or lend small businesses somewhere between ______ percent of the face value of the accounts receivable being factored.

A) 40 and 60
B) 45 and 70
C) 55 and 80
D) 70 and 90

Question 43

Self-liquidating loans are often ______.

A) unavailable
B) tied to life insurance
C) provided by family members
D) unsecured

Question 44

Which type of loans are provided by commercial finance companies and allow small businesses to have use of state-of-the-art equipment at a fraction of the cost?

A) leasing
B) floor planning
C) balloon notes
D) factoring accounts receivable

Question 45

The practice of raising funds for a business through the sale of accounts receivable is known as which of the following?

A) leasing
B) floor planning
C) balloon notes
D) factoring accounts receivable

Question 46

Loans that are granted by commercial banks to entrepreneurs that are then guaranteed at up to 90 percent of the loan value by the SBA as part of the 7(a) program are called which of the following?

A) SBA loans
B) guaranteed loans
C) direct loans
D) 504 loans

Question 47

The purchase of goods from suppliers who do not demand payment immediately is called which of the following?

A) trade credit
B) guaranteed loans
C) direct loans
D) LowDoc program

Question 48

Commercial finance companies extend short- and intermediate-term credit to small businesses at an interest rate that is ______ commercial banks.

A) lower than
B) the same as
C) higher than
D) the prime interest given by

Question 49

A relatively new loan program available through the SBA that simplifies the paperwork and reduces the time required for a loan answer that has historically been required is the ______.

A) SBA loan
B) guaranteed loan
C) direct loan
D) SBA express program

Question 50

Most state and local government programs usually have ______ interest rates than conventional loans, often with ______ maturities.

A) higher; longer
B) higher; shorter
C) lower; longer
D) lower; shorter

Question 51

Which of the following is an appropriate follow-up action if a potential lender initially says "no"?

A) ask for advice
B) avoid further communication
C) submit the same application again
D) show resentment

Question 52

The Department of Commerce estimates that nearly ______ of all startups begin without borrowed funds.

A) 10 percent
B) 30 percent
C) 66 percent
D) 75 percent

Question 53

At Lou's Landscaping Services, a number of customers were not paying up on time, and Lou needed cash for a large purchase. As a result, Lou sold the company's accounts receivable to a finance company for 70 percent of the total collection amount. This method of raising funds is referred to as ______.

A) floor planning
B) bartering
C) crediting
D) factoring

Question 54

Under the SBA express program, up to ______ can be borrowed by a small business with a one-page application.

A) $10,000
B) $150,000
C) $75,000
D) $350,000

Question 55

______ are made to small business owners based on the amount of money paid in premiums on an insurance policy that has a cash surrender value.

A) Floor planning loans
B) Leases
C) Installment loans
D) Policy loans

Question 56

An insurance company will frequently lend up to ______ of a policy's cash surrender value.

A) 10 percent
B) 30 percent
C) 59 percent
D) 95 percent

Question 57

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

A) 10
B) 20
C) 35
D) 50

Question 58

What type of loan requires collateral as security for the lender?

A) lateral loan
B) unsecured loan
C) secured loan
D) installment loan

Question 59

A small business may qualify for loans through a commercial bank where a portion of the loan is guaranteed by the Small Business Administration. This loan is known as ______.

A) an SBA loan
B) a government loan
C) a direct loan
D) a 504 loan

Question 60

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 61

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

Question 62

Approximately what percentage of U.S. businesses are partnerships?

A) 2
B) 10
C) 20
D) 30

Question 63

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 64

Scenario 9-1. Jim is interested in beginning his own small business dealing with the repair and maintenance of household appliances. He has a talent for fixing these types of appliances and has been doing so as a sideline business for several years. He has acquired some of the needed tools; however, a sizeable investment will need to be made in tools and equipment in order for him to repair the appliances that will be brought to his shop for service. He would like part of his competitive advantage to be the capability to fix all appliances, not just one type. Jim has just one small problem--a lack of funds. He comes to you for advice.

-In Scenario 9-1, the primary disadvantages of using equity financing are all but which of the following?

A) it allows a voice in the management of the business
B) it provides for a sharing of the profits
C) it does not constrain cash flow
D) it shares ownership in the business

Question 65

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

Question 66

NARRBEGIN: 9-2
Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan's Road Machines. He would like to sell a variety of all-terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five C's of credit when looking at external funding in order to prove his creditworthiness.
NARREND
In Scenario 9-2, Ryan has never borrowed money before; however, he currently has a loan outstanding for his school expenses. Which of the five C's is judged primarily on the applicant's past repayment patterns?

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

Question 67

Scenario 9-1. Jim is interested in beginning his own small business dealing with the repair and maintenance of household appliances. He has a talent for fixing these types of appliances and has been doing so as a sideline business for several years. He has acquired some of the needed tools; however, a sizeable investment will need to be made in tools and equipment in order for him to repair the appliances that will be brought to his shop for service. He would like part of his competitive advantage to be the capability to fix all appliances, not just one type. Jim has just one small problem--a lack of funds. He comes to you for advice.

-In Scenario 9-1, Jim has two basic choices when looking for funds. They are which of the following?

A) assets and liabilities
B) debt and assets
C) debt and equity
D) equity and assets

Question 68

NARRBEGIN: 9-2
Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan's Road Machines. He would like to sell a variety of all-terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five C's of credit when looking at external funding in order to prove his creditworthiness.
NARREND
In Scenario 9-2, a major concern of any provider of funding will be Ryan's ability to repay his loan. This refers to which of the five C's?

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

Question 69

NARRBEGIN: 9-2
Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan's Road Machines. He would like to sell a variety of all-terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five C's of credit when looking at external funding in order to prove his creditworthiness.
NARREND
In Scenario 9-2, Ryan's inventory will provide a large part of this
C) The machines themselves can be pledged as security in order to meet the C of ______.

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

Question 70

Walter is a retired CEO of a Fortune 500 company. He now focuses much of his energy on loaning money to new business owners who have innovative ideas but limited funds. Walter can best be described as what type of angel?

A) professional angel
B) micromanagement angel
C) corporate angel
D) white angel

Question 71

Which of the following involves the sale of stock to a selected group of individuals where the stock cannot be purchased by the general public?

A) venture capitalists
B) small business investment companies
C) angels
D) private placement

Question 72

NARRBEGIN: 9-2
Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan's Road Machines. He would like to sell a variety of all-terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five C's of credit when looking at external funding in order to prove his creditworthiness.
NARREND
In Scenario 9-2, at the present, the economy is growing rapidly. In fact, it is growing so rapidly, there is a continuing discussion that interest rates may need to be raised in order to slow economic growth. These factors refer to which of the five C's?

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

Question 73

Scenario 9-1. Jim is interested in beginning his own small business dealing with the repair and maintenance of household appliances. He has a talent for fixing these types of appliances and has been doing so as a sideline business for several years. He has acquired some of the needed tools; however, a sizeable investment will need to be made in tools and equipment in order for him to repair the appliances that will be brought to his shop for service. He would like part of his competitive advantage to be the capability to fix all appliances, not just one type. Jim has just one small problem--a lack of funds. He comes to you for advice.

-In Scenario 9-1, the primary disadvantages of using debt financing are all but which of the following?

A) it increases risk due to the possibility of insolvency
B) it allows a voice in management of the business
C) it has to be repaid
D) leverage can enable returns to be lessened

Question 74

The first sale of the stock of a business that is made available to public investors is known as which of the following?

A) an IPO
B) a small business investment company
C) an angel
D) a private placement

Question 75

Doctors, lawyers, and accountants make up what category of angels?

A) professional angels
B) micromanagement angels
C) entrepreneurial angels
D) enthusiast angels

Question 76

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

Question 77

NARRBEGIN: 9-2
Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan's Road Machines. He would like to sell a variety of all-terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five C's of credit when looking at external funding in order to prove his creditworthiness.
NARREND
In Scenario 9-2, in judging this C, the net worth of the business will be determined. The value of the assets minus the value of the liabilities will provide the determination for ______.

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

Question 78

An investor who is typically a successful entrepreneur who has a desire to assist startups or emerging businesses by investing $20,000 to $50,000 is known as a/an ______.

A) venture capitalist
B) small business investment company
C) angel
D) private placement

Question 79

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

Question 80

Groups or individuals who invest in specific high-potential new or expanding firms are called which of the following?

A) venture capitalists
B) small business investment companies
C) angels
D) private placements