Deck 16: Obtaining Debt Capital

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Time-sales financing is a way for a seller to generate cash from a long-term installment accounts receivable.

Question 5

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

Question 6

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

Question 7

When a seller of high-end services wants to offer installment payment terms to purchasers,they can sell and assign that installment contract to a bank or sales finance company.

Question 8

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 9

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

Question 10

In the US,commercial banks are the primary source of debt capital for existing (not new)businesses.

Question 11

Finance companies have reasonable prepayment penalties.

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

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

Question 22

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

Question 23

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

Question 24

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

Question 25

Factoring is a cheap method for turning receivables into cash.

Question 26

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 above

Question 27

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

Question 28

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

A) Factors
B) Commercial banks
C) Commercial finance companies
D) Depends on the deal

Question 29

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

Question 30

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

Question 31

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

Question 32

Trade credit is reflected as what on the balance sheet?

A) Accounts receivable
B) Accounts payable
C) Notes outstanding
D) Goodwill

Question 33

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

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

Question 34

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

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

Question 35

Effective entrepreneurs think of the process of obtaining a loan as a sales job.

Question 36

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 37

Loan covenants are designed so as not to hinder a company's growth.

Question 38

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

Question 39

Restrictive loan covenants are not negotiable.

Question 40

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

A) Textiles
B) Furniture
C) Plastics
D) Automotive

Question 41

Why do startups have a more difficult time borrowing money than existing businesses?

Question 42

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

Question 43

Following the restructuring of debt in a turnaround situation,that forgiven debt becomes ________ for the entrepreneur who owns the company and who has personally had to guarantee the loans.

Question 44

What are the three distinguishing features of term loans?

Question 45

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

Question 46

Leverage improves present value,but increases ________.

Question 47

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

Question 48

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 _________.

Question 49

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

Question 50

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

Question 51

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

Question 52

Under _________ financing,the bank purchases installment 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 53

How can leasing provide tax advantages?

Question 54

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

Question 55

Which of the following can provide tax advantages?

A) Commercial loan
B) Factoring
C) Lines of credit
D) Leasing

Question 56

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

Question 57

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

Question 58

Identify the two most likely sources of debt financing for a startup company.

Question 59

A ________ 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 60

Commercial finance companies lend against the ________ value of assets.

Question 61

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

Question 62

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

Question 63

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