Deck 17: Sources of Debt Financing

Question 1

________ is (are)a method of financing frequently employed by retailers of "big ticket items"-autos and major appliances.

A)Discounted installment contracts
B)Trade credit
C)Installment loans
D)Floor planning

Answer 1

D

Question 2

When a small business is refused a loan because it is not profitable and deemed a poor credit risk,the owner can usually turn to ________ as a source of short-term funds.

A)venture capital companies
B)trade credit
C)stockbrokers
D)loans from insurance companies

Answer 2

B

Question 3

Asset-based financing:

A)is efficient since the small business borrows only the money it needs.
B)provides less borrowing capacity than inventory-based financing.
C)is more expensive than other types of financing.
D)is less desirable than inventory-only deals to bankers.

Answer 3

C

Question 4

Asset-based lenders avoid inventory-only deals;they prefer to make loans backed by inventory and:

A)experienced management.
B)good market reputation.
C)more secure accounts receivable.
D)All of the above

Question 5

A ________ is an agreement with a bank that allows a small business to borrow up to a predetermined specified amount during the year without making an application each time.

A)term loan
B)factor
C)line of credit
D)floor plan

Question 6

The most common form of secured credit is:

A)accounts receivable financing.
B)inventory financing.
C)floor planning.
D)discounted installment contracts.

Question 7

________ is (are)an asset-based financing technique.

A)Discounted installment contracts
B)Inventory financing
C)Installment lending
D)Floor planning

Question 8

Janis Reardon is in the process of launching a craft shop.Her biggest supplier,Lothrop's Craft Supply,agrees to sell her the inventory she needs to stock her store on a delayed payment schedule.Janis is using what type of financing?

A)Line of credit
B)Floor planning
C)Trade credit
D)Asset-based borrowing

Question 9

Sometimes small businesses have to use debt financing instead of equity financing.When they do,they discover that:

A)banks give them a lower interest rate because of their closeness to the customer and better management practices.
B)finance companies are their primary source for debt funding.
C)the cost of debt financing is often less than the cost of equity financing.
D)there are fewer lenders than investors in the marketplace,but the money is easier to get from lenders.

Question 10

The most common method used by commercial finance companies to provide credit to small businesses is:

A)asset-based.
B)insurance-based.
C)unsecured lines of credit or "character loans."
D)balance-sheet based.

Question 11

As the providers of debt financing to small businesses,banks tend to:

A)make only asset-based,long-term loans.
B)be very conservative and lend primarily short-term capital.
C)focus on either inventory or accounts receivable when evaluating a business's loan requests.
D)be eager lenders to start-ups as these tend to be smaller loans at less risk.

Question 12

For small businesses,________ are the heart of the financial market.

A)banks
B)finance companies
C)private placement
D)insurance companies

Question 13

Term loans impose restrictions called:

A)loan boundaries.
B)covenants.
C)financial limits.
D)margins.

Question 14

The most common type of commercial bank loan granted to small businesses is:

A)the short-term commercial loan.
B)the lines of credit agreement.
C)the floor plan.
D)the unsecured term loan.

Question 15

Which form of financing works especially well for manufacturers,wholesalers,distributors,and other companies with significant stocks of inventory,accounts receivable,equipment,real estate,or other assets?

A)Asset-based lenders
B)Corporate investors
C)Government funding
D)None of the above

Question 16

In asset-based borrowing,the ________ is the percentage of an asset's value that a lender will lend.

A)prime rate
B)margin rate
C)advance rate
D)discounted rate

Question 17

Sunny Bright's The Tanning Parlor is in the middle of its busy season.The hiring of extra help,some unexpected repairs on equipment,etc. ,has led to a shortage of operating capital.What type of financing would Sunny most likely use in this situation?

A)Line of credit
B)Floor planning
C)A discounted installment contract
D)An asset-based loan

Question 18

A small retail boat shop is most likely to rely on ________ to finance its inventory.

A)discounted installment contracts
B)floor planning
C)installment loans
D)trade credit

Question 19

Asset-based borrowing permits small businesses:

A)to borrow up to 100% of the value of their inventory or their accounts receivable for the money they need for long-term goals.
B)to use normally unproductive assets-accounts receivable and inventory.
C)to obtain loans more easily but with less borrowing power than if they used an unsecured line of credit.
D)access to a source of funds ideally suited for long-term financing needs.

Question 20

Term loans often have a ________ feature,which means that after three to five years,the full amount of principal is due before the amortized payments fully repay the loan.

A)parachute
B)covenant
C)balloon
D)handcuff

Question 21

The loans of commercial finance companies to small businesses:

A)tend to be for less than a commercial bank but at a lower interest rate.
B)are offered based on the company's balance sheet.
C)tend to be at a lower interest rate but are harder to get.
D)are in many of the same forms as commercial bank offers.

Question 22

Grants to small businesses,made to strengthen the local economy in cities and towns that are considered economically distressed,are made by:

A)the Department of Housing and Urban Development.
B)a local development company.
C)the Farmers Home Administration.
D)the Economic Development Administration.

Question 23

SBICs may lend up to ________% of their private capital to a single client.

A)10
B)30
C)20
D)49

Question 24

A(n)________ is a private nonprofit financial institution that will make small loans to its members for the purpose of starting a business.

A)SBIC
B)private placement
C)credit union
D)insurance company

Question 25

The typical private placement of debt is characterized by:

A)a variable interest rate.
B)a maturity shorter than most bank loans.
C)more restrictions imposed on the borrower than with a comparable bank loan.
D)a spreading of risk by the selling of the debt to one or more small investors.

Question 26

This program was started to encourage small businesses that wanted to expand their research and development efforts.It has made over 36,000 awards in excess of $10 billion.

A)Small Business Technology Transfer Act
B)Local development companies
C)The SBA CAPLine program
D)Small Business Innovation Research Program

Question 27

A federally-sponsored program which offers loan guarantees to create and expand businesses in areas with below-average income and high unemployment is called:

A)the Small Business Administration.
B)the Economic Development Administration.
C)SBIC.
D)the Farmers Home Administration.

Question 28

In contrast to traditional lenders,finance companies offer small business borrowers:

A)faster turnaround times.
B)longer repayment schedules.
C)more flexible payment plans.
D)All of the above

Question 29

SBICs:

A)were chartered by the SBA to help start-up companies find private financing from commercial banks and finance companies.
B)provide short-term debt-based capital to small businesses through the sale of the debt to private investors.
C)cannot invest in or lend money to a business for more than five years.
D)were created by the Small Business Investment Act to use a combination of private and federal guaranteed debt to provide long-term capital to small businesses.

Question 30

A(n)________ is a hybrid between a conventional loan and a bond;at its heart it is a bond,but its terms are tailored to the borrower's individual needs,as a loan would be.

A)private placement
B)industrial revenue bond
C)504 loan
D)zero coupon bond

Question 31

Which of the following businesses would be eligible for an SBA loan?

A)A small computer manufacturer
B)A nonprofit business
C)A magazine publisher
D)A casino

Question 32

Entrepreneur Wally Wilton wants to build a colossal amusement park for kids of all ages.Wilton will need $48 million to get the first phase of "Wally World" into operation.Which of the following is the type of loan best suited for Wally?

A)An asset-based loan,based on inventory or accounts receivable
B)A mortgage loan from an insurance company
C)A credit union loan
D)A MESBIC loan

Question 33

Insurance companies typically make two types of loans:

A)policy loans and mortgage loans.
B)asset-based,inventory and discounted accounts receivable.
C)short-term and policy loans.
D)mortgage loans and unsecured loans.

Question 34

SBICs must invest at least ________ percent of their capital in smaller businesses,which are defined by the SBA as those with a tangible net worth of less than $6 million and an average of $2 million in net income over the previous two years at the time of investment.

A)75
B)60
C)25
D)50

Question 35

A loan from a stockbroker,based on the stocks and bonds in the customer's portfolio:

A)tends to be at a higher rate than a bank but easier to obtain.
B)can be "called" for payment in a matter of hours or days.
C)is for a maximum of $50,000.
D)has a fixed repayment schedule and must be paid within 90 days.

Question 36

The U.S.Department of Agriculture provides financial assistance to certain small businesses through the Rural Business-Cooperative Service (RBS).The RBS program is open to:

A)just farms.
B)urban businesses.
C)rural businesses.
D)all types of businesses.

Question 37

A popular form of debt financing with large companies,a sort of corporate "IOU," which is becoming more accessible to a growing number of small companies is:

A)stockbroker-based loans.
B)bonds.
C)commercial bank loans.
D)SBICs.

Question 38

The most common method of SBIC financing is the:

A)equity instrument.
B)debt instrument combined with equity investment.
C)debt instrument.
D)line of credit.

Question 39

Small Business Investment Companies (SBICs):

A)prefer to finance companies in later stages rather than "raw start-ups."
B)only provide long-term debt financing to small businesses.
C)cannot make their own investment decisions,which are controlled by the SBA.
D)loan money through debentures not requiring regular interest payments.

Question 40

Small manufacturers (for example)needing money for fixed assets with long repayment schedules have access to an attractive,relatively inexpensive source of funds called:

A)zero-coupon bonds.
B)industrial development bonds (IDBs).
C)corporate bonds.
D)Both A and C

Question 41

A small business that uses factoring:

A)pledges its accounts receivable as collateral to obtain a loan from a financial institution.
B)relies on a third-party consultant to apply for SBA-guaranteed loans.
C)sells its accounts receivable to a third party to get the capital it needs.
D)borrows money from lenders by offering them the option to convert the loan into stock in the company.

Question 42

The maximum amount of a disaster assistance loan is ________ dollars.

A)100,000
B)500,000
C)1 million
D)2 million

Question 43

Typical short term loans are for:

A)purchase of more inventory.
B)purchase of computers.
C)positive cash to pay other debts.
D)All of the above

Question 44

When a bank proves the quality of its loan decisions to the SBA and becomes a ________ lender,the bank makes the final lending decision itself,subject to SBA review for the guarantee.

A)preferred
B)qualified
C)certified
D)LDC

Question 45

The SBA's ________ program offers short-term capital to growing companies seeking to finance seasonal buildups in inventory or accounts receivable.

A)The Direct Loan
B)CDC
C)Immediate Participation Loan
D)CAPLine

Question 46

The capital access programs (CAPs)were first introduced in:

A)Iowa.
B)Michigan
C)Wisconsin.
D)New York.

Question 47

Factoring:

A)is a more expensive method of financing than borrowing from a bank.
B)places the risk of uncollected accounts receivable on the small business owner.
C)is best used as a long-term source of capital.
D)is a type of trade credit.

Question 48

The majority of loans provided by the SBA are:

A)direct.
B)preferred.
C)guaranteed.
D)immediate participation.

Question 49

The loan ceiling for the International Trade Loan Program is

A)$500,000.
B)$2 million.
C)$1 million.
D)$100,000.

Question 50

Which of the following factors do banks focus on when lending money to a company?

A)Personal guarantee
B)Positive cash flow
C)Successful track record
D)All of the above

Question 51

An amortization schedule is:

A)a breakdown of the loan payment which includes the interest rate and number of years for the loan to be paid.
B)a breakdown of all fixed assets with their depreciation schedule.
C)a schedule the company has to provide the bank as part of their financial statements.
D)All of the above

Question 52

The average interest rate on SBA-guaranteed loans is:

A)prime minus 2 percent.
B)2 percent.
C)prime plus 2 percent.
D)7 percent.

Question 53

Some of the reasons which small business owners should consider borrowing money are:

A)gaining market share.
B)refinancing existing debt.
C)taking advantage of cash discounts.
D)All of the above

Question 54

A(n)________ is a nonprofit organization licensed by the SBA and designed to promote economic growth in local communities.

A)FDC
B)CDC
C)GDC
D)RDC

Question 55

Which of the following retailers may use floor planning financing?

A)Car dealer
B)Shoe store
C)Carpet dealer and cleaning service
D)All of the above

Question 56

________ were created by the SBA in 1992 to provide loans under $50,000 that are normally shunned by banks.

A)Microloans
B)Preferred loans
C)Seasonal line of credits
D)8(a)program loans

Question 57

Installment loans have to be repaid in:

A)5 to 10 years.
B)10 to 30 years.
C)1 to 3 years.
D)None of the above

Question 58

When a bank makes enough good SBA-guaranteed loans to become a ________ lender,the SBA promises a faster turnaround time for the loan decision-typically 3 to 10 business days.

A)preferred
B)qualified
C)certified
D)LDC

Question 59

A line of credit means:

A)the company has access to unlimited funds.
B)a line of credit is the same as long-term loan.
C)a line of credit remains active forever.
D)None of the above

Question 60

________ is designed to provide working capital to small exporters by providing loan guarantees of 90 percent of the loan amount up to $1.5 million.

A)A CAPLine program
B)A Section 504 loan
C)An LDC loan
D)An export working capital program

Question 61

Convertible bonds:

A)can't be converted to equity.
B)typically pay a lower interest rate.
C)typically pay a higher interest rate.
D)None of the above

Question 62

A line of credit is usually secured by collateral.

Question 63

Installment loans are made to big firms for purchasing other businesses.

Question 64

Unsecured term loans typically involve very specific terms which may limit the owner's freedom to make financial decisions.

Question 65

Asset-based lenders require:

A)government approval.
B)state approval.
C)credit.
D)all of the above.

Question 66

A recent survey of small companies with lines of credit found that only 25% actually use them.

Question 67

Jones Manufacturing has been in business for 30 years.About 3 years ago,the company spent about $2.5 million in upgrading/purchasing new equipment.Currently,due to bad weather,the company is suffering cash flow problems and is not able to pay its expenses or inventory purchases.One option for financing would be:

A)inventory financing.
B)asset-based financing.
C)sell the business.
D)All of the above

Question 68

Term loans impose restrictions called covenants.

Question 69

A small business owner should avoid borrowing money when he/she sees a downturn in business or to refinance existing debt.

Question 70

The common short-term loan is for one year,often repaid sooner,and repaid in one lump sum.

Question 71

A boat retailer would most likely use a line of credit to finance the purchase of his inventory.

Question 72

47% of small business owners rely on banks as their source of start-up capital.

Question 73

Commercial banks are lenders of last resort for small businesses.

Question 74

Nonbank sources of debt financing could be based on:

A)asset-based lenders.
B)inventory financing.
C)Both A and B
D)None of the above

Question 75

In an installment loan for equipment,the loan's amortization schedule would coincide with the equipment's useful life.

Question 76

Commercial banks are primarily lenders of short-term capital to small businesses.

Question 77

In installment loans,the loan's ________ schedule typically coincides with the length of the equipment's usable life.

A)interest
B)tax
C)evaluation
D)amortization

Question 78

A business owner does not pay interest on a floor-planned item in inventory until it is sold.

Question 79

Generally speaking,all growing companies need to borrow money at some point.

Question 80

Banks focus on a small business's ability to generate a positive cash flow when lending money.