Question 1

Before making a loan to a business startup, banks prefer to see:

Accepted Answer

Banks prefer to see sufficient cash flow, ample collateral, and an SBA guarantee as these factors reduce the risk associated with lending to a startup.

Question 2

Asset-based borrowing permits small businesses:

Accepted Answer

Asset-based borrowing allows small businesses to use assets that are typically unproductive or sitting idle, such as inventory or accounts receivable, as collateral for a loan. This allows them to obtain financing they may not have been able to access through traditional lending options. However, they may not be able to borrow up to 100% of the asset value, and the borrowing power may be less than what an unsecured line of credit would offer. Asset-based borrowing is often used for short-term financing needs rather than long-term goals.

Question 3

Entrepreneurs basically "borrow from themselves" by pledging their ________ as collateral for the loans they receive in a ________ .

Accepted Answer

Entrepreneurs pledge their homes as collateral for home equity loans, which they then use as capital for their businesses. This allows them to "borrow from themselves" since they are essentially using their personal assets to fund their business endeavors.

Question 4

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

Accepted Answer

Advance rate is the percentage of an asset's value that a lender will lend in asset-based borrowing. A margin rate refers to the interest rate that a lender charges on the loan amount, while a discounted rate is a lower interest rate offered as an incentive for early payment. The prime rate is the interest rate that banks charge their best customers.

Question 5

In inventory financing, a small business can typically borrow an amount equal to ________ percent of the inventory it pledges as collateral.

Accepted Answer

The answer of In inventory financing, a small business can...

Question 6

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

Accepted Answer

The answer of The most common method used by commercial...

Question 7

Which of the following is not an asset-based financing technique?

Accepted Answer

A term loan is not an asset-based financing technique. It is a type of financing that is typically based on a company's creditworthiness and ability to repay the loan, rather than the value of its assets. Asset-based financing techniques, such as discounting accounts receivable and inventory financing, are designed to provide funding based on the value of a company's assets.

Question 8

Financing through ________ is similar to trade credit and this source of financing offers reasonable credit terms with only a modest down payment with the balance financed over the life of the purchase.

Accepted Answer

The answer of Financing through ________ is similar to trade...

Question 9

A bank loan that imposes restrictions or covenants on the business decisions an entrepreneur makes concerning the company's operations is called a:

Accepted Answer

The type of loan described in the question is a term loan with covenants. A term loan is a type of bank loan where money is borrowed for a specific period of time with a fixed interest rate. The covenants in the loan agreement impose restrictions and obligations on the borrower, such as limitations on the amount of debt the company can take on or requiring the company to maintain a certain level of financial performance. This type of loan is used to reduce the lender's risk and ensure the borrower's ability to repay the loan. A home equity loan is a loan taken out against the equity in a home, floor planning is a type of financing used by retailers to purchase inventory, and a line of credit is a flexible form of financing where funds can be drawn upon as needed up to a specific limit.

Question 10

A company pledging its inventory, accounts receivables, or fixtures as collateral for a loan is using:

Accepted Answer

Pledging inventory, accounts receivables, or fixtures as collateral for a loan is known as asset-based financing. This type of financing uses the company's assets as collateral to secure the loan, and is often utilized by companies that may not have strong credit histories or cash flow.

Question 11

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.

Accepted Answer

A line of credit is an arrangement with a bank that allows a small business to access funds up to a certain amount without having to apply for a loan each time. This provides flexibility for businesses to manage cash flow and cover unexpected expenses. Term loans are a type of loan where the borrower receives a lump sum of money and repays it over a specified period of time. Factors are financial intermediaries that buy a company's accounts receivables at a discount in exchange for immediate cash. Floor plans are a type of financing typically used by car dealerships to purchase inventory.

Question 12

The Tanning Parlor is in the middle of the busy season. Owner Sunny Bright has hired extra help and encountered some unexpected repairs that have left her short of operating capital. What type of financing would Sunny most likely use in this situation?

Accepted Answer

A line of credit is a flexible type of financing that allows business owners to borrow money up to a specific limit, as needed. This would be a good solution for Sunny Bright because it would provide her with the operating capital she needs to keep her business running smoothly during the busy season. She can draw funds from the line of credit as needed and only pay interest on the amount she borrows. This is a common choice for businesses with fluctuating cash flow needs.

Question 13

A term loan:

Accepted Answer

A term loan may be secured or unsecured depending on the lender's requirements, and it often includes restrictions or covenants to ensure repayment. It is based on a firm's past operating history and its ability to repay the loan, making all options correct.

Question 14

________ is a method of financing frequently used by retailers of "big ticket items" such as autos.

Accepted Answer

Floor planning is a common financing method used by retailers of big ticket items such as automobiles. With floor planning, the retailer borrows money to purchase inventory and then uses that inventory as collateral for the loan. As the retailer sells the inventory, they pay back the loan and are able to purchase additional inventory with the proceeds. This allows retailers to keep their inventory levels high without having to tie up their own cash in the purchase of the inventory.

Question 15

The advance rate on inventory-based loans is usually between 10 to 50 percent, but a business pledging high-quality accounts receivable as collateral may be able to negotiate up to an ________ percent advance rate.

Accepted Answer

The answer of The advance rate on inventory-based loans is...

Question 16

The loans from commercial finance companies to small businesses:

Accepted Answer

Commercial finance companies often offer similar types of loans as commercial banks, but they tend to have higher interest rates. These loans are also easier to qualify for than traditional bank loans, but still require some level of creditworthiness and earning power on the part of the small business.

Question 17

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

Accepted Answer

The answer of The most common type of commercial bank...

Question 18

Savings and loan associations typically specialize in loans for:

Accepted Answer

Savings and loan associations typically specialize in loans for real property, such as mortgages for homes or commercial real estate.

Question 19

The Boat and Ski Shop, a small retail boat shop, would most likely rely on which of the following methods to finance its inventory?

Accepted Answer

The Boat and Ski Shop would most likely rely on floor planning to finance its inventory. Floor planning is a financing option where a lender provides a revolving line of credit based on the value of the dealer's inventory. The dealer can use this credit to purchase new inventory, and as each item is sold, the dealer repays the amount borrowed for that item and can use the credit again to purchase new inventory. This is a common financing method used in the retail boat and ski industry.

Question 20

In discounted accounts receivable financing, a small business can typically borrow an amount equal to ________ percent of its receivables it pledges as collateral.

Accepted Answer

In discounted accounts receivable financing, a small business can typically borrow an amount equal to 55-85 percent of its receivables it pledges as collateral. This is because the lender takes into account the creditworthiness of the business's customers and the age of the receivables before deciding on the amount to lend.

Quiz 13: Sources of Financing: Debt and Equity