Deck 7: How to Obtain the Right Financing for Your Business

Question 1

The real owners of a firm are the _____.

A) common stockholders
B) preferred stockholders
C) commercial banks
D) insurance companies

Answer 1

A

Question 2

_____ have a superior claim to the firm's profits.

A) Common stockholders
B) Insurance companies
C) Commercial banks
D) Preferred stockholders

Answer 2

D

Question 3

Small business investment companies are:

A) a group of wealthy local businesspeople and other investors who may be external sources of equity funding.
B) the dominant suppliers of external financing to small firms.
C) firms that make investments based on projected future income and generally require a substantial return as either equity or profit.
D) private firms licensed and regulated by the SBA to make "venture" investments in small firms.

Answer 3

D

Question 4

In the context of small businesses, which of the following is true of preferred stock?

A) It usually conveys no voting rights to its holder.
B) Preferred stock dividends must be paid after common stock dividends.
C) It represents the owners' interest.
D) It usually consists of many identical shares.

Question 5

A _____ is a contract that permits use of someone else's property for a specified time period.

A) trade credit
B) bond
C) lease
D) bill of lading

Question 6

A _____ is a long-term debt that is secured by real estate property.

A) mortgage loan
B) bond
C) lease
D) asset-based loan

Question 7

_____ are relatively permanent and are necessary for the functioning of the business.

A) Trade credits
B) Fixed assets
C) Current assets
D) Accounts receivables

Question 8

In the context of small businesses, which of the following is true of asset-based financing?

A) All asset-based loans are financed against inventory.
B) It accepts the assets of a firm as collateral in exchange for a loan.
C) Of all assets, inventory is considered the most liquid of a service company's assets.
D) It is a form of debt security with a standard denomination and method of interest payment.

Question 9

_____ project working capital needs by estimating what out-of-pocket expenses will be incurred and when revenues from these sales are to be collected.

A) Cash budgets
B) Dividend statements
C) Capital account statements
D) Expense accounts

Question 10

In the context of small businesses, which of the following statements regarding common stock is true?

A) Common stockholders have an enforceable claim to dividends.
B) It represents the owners' interest.
C) Common stockholders are paid before preferred stockholders.
D) It conveys no voting rights to its holder.

Question 11

Which of the following is true about debt securities?

A) Debt securities are usually in the form of preferred stocks.
B) When companies are growing faster than they can make money, many prefer asset-based financing.
C) Publicly issued debt (such as bonds or commercial paper) is more commonly used by smaller companies.
D) Financial institutions, such as insurance companies, prefer to make short-term loans.

Question 12

In the context of small businesses, which of the following is true of debt securities?

A) Commercial banks prefer to make long-term loans.
B) Publicly issued debt is commonly used by small firms.
C) Small companies rely on loans from commercial banks.
D) Insurance companies prefer to make short-term loans.

Question 13

_____ is current assets, less current liabilities, that a firm uses to produce goods and services and to finance the extension of credit to customers.

A) Debt capital
B) Equity
C) Fixed asset
D) Working capital

Question 14

In the context of small businesses, what is financial leverage?

A) Making a financial claim to the profit left after all other claims against the business have been met
B) Employing a form of debt security with a standard denomination
C) Financing the extension of credit to customers
D) Using fixed-charge financing to fund a business's operation

Question 15

Which of the following is true of venture capital firms?

A) They rely more heavily on the business plan than on the executive summary in making investment decisions.
B) They are a source of debt financing.
C) They prefer to back fast-growth industries.
D) They are engaged in assisting disadvantaged businesses.

Question 16

_____ are wealthy individuals who invest part of their assets in high-risk, high-return ventures.

A) Business incubators
B) Debt creditors
C) Trade creditors
D) Angel capitalists

Question 17

_____ is a form of debt security with a standard denomination, method of interest payment, and method of principal repayment.

A) Lease
B) Bond
C) Chattel
D) Mortgage

Question 18

Which of the following is true about small company offering registration (SCOR)?

A) It is a form of debt security with a standard denomination.
B) It is a contract that permits use of someone else's property.
C) It is the sale of common stock to the public through a regulated board.
D) It is not permitted in most states.

Question 19

A _____ is debt backed by some physical asset other than land, such as machinery, equipment, or inventory.

A) mortgage loan
B) common equity
C) preferred equity
D) chattel mortgage loan

Question 20

In the context of small businesses, _____ comes from lenders who will be repaid at a specified interest rate within a specified time span.

A) equity financing
B) debt financing
C) venture funding
D) stock market funding

Question 21

When sales are made on credit, the firm must carry the costs of production itself for an extended period.

Question 22

Preferred stockholders usually retain the right to vote for company directors.

Question 23

Small businesses' assets, such as buildings, should be financed with long-term loans.

Question 24

What is the purpose of specialized small business investment companies?

A) They extend credit by vendors on purchases of inventory, equipment, and supplies.
B) They allow small businesses to reap tax advantages by selling stock shares to workers.
C) They sell common stock to the public through a regulated board such as Nasdaq without the hassle of an initial public offering.
D) They assist socially and economically disadvantaged businesses with venture capital.

Question 25

_____ is extended by vendors on purchases of inventory, equipment, and/or supplies.

A) Venture capital
B) Asset-based financing
C) Mortgage loan
D) Trade credit

Question 26

Which of the following is true of small business investment companies (SBICs)?

A) They are limited to the sale of debentures.
B) The SBA matches each dollar an SBIC puts into a loan.
C) They are prohibited from selling securities similar to preferred stock.
D) They cannot make qualified SBA loans.

Question 27

Debt represents an owner's share of the assets of a company.

Question 28

Which of the following is true of the Small Business Administration?

A) It offers environmentally friendly products for commercial sale.
B) It generally requires a substantial return as either equity or profit.
C) It helps small firms find financing at reasonable rates.
D) It allows small businesses to reap tax advantages by selling stock shares to workers.

Question 29

Growing companies are best financed entirely with debt financing.

Question 30

John, who needs funding for his small business, approaches a few lenders for funds. Which of the following will be true in this situation?

A) The lenders should have a voice in managing his business.
B) John's ability to attract money does not depend on the lender's perception of his character.
C) John's credit history will not be checked when he requests funding, because his business is small.
D) Since the money being borrowed is for an existing business, the lender(s) will typically look at its track record.

Question 31

Preferred stockholders give up their right to receive profits in exchange for the right to vote for the corporation's directors.

Question 32

_____ is a source of financing that reaps tax advantages from selling shares to workers.

A) Employee stock ownership plan
B) Small business investment company
C) Specialized small business investment
D) Small company offering registration

Question 33

In the context of small businesses, which of the following is true of consignment selling?

A) Payments are made to suppliers only when the products are sold.
B) It consists of two or more companies exchanging items of roughly equal value.
C) It allows small businesses to reap tax advantages by selling stock shares to workers.
D) It is regulated by the Federal Small Business Administration.

Question 34

_____ consists of two or more companies exchanging items of roughly equal value.

A) Venture capital
B) Barter
C) Equity
D) Trade credit

Question 35

If a business has an operating history, its future needs can be estimated with relative accuracy, even with substantial growth.

Question 36

In the context of small businesses, which of the following is true of business incubators?

A) They reap tax advantages from selling shares to workers.
B) They nurture young firms and help them survive.
C) They are run by the Federal Small Business Administration.
D) They require a substantial return as either equity or profit.

Question 37

Debt financing comes from lenders who will be repaid at a specified interest rate within an agreed-on time span.

Question 38

In the context of small businesses, which of the following is true of a line of credit?

A) It permits a business to borrow up to a set amount without red tape.
B) It represents ownership in a corporation.
C) It permits use of someone else's property for a specified time period.
D) It is an owner's share of the assets of a company.

Question 39

The role of equity financing is to serve as a buffer that protects creditors from loss in case of financial difficulty.

Question 40

Working capital is an owner's share of the assets of a company.

Question 41

Small company offering registration is the sale of common stock to the public through a regulated board, such as Nasdaq.

Question 42

No dividends can be paid to the common stockholders until preferred stock dividends have been paid.

Question 43

The purpose of business incubators is to shelter failing enterprises by providing financial services.

Question 44

Most asset-based loans are financed against accounts receivable.

Question 45

Employing a fixed charge to increase the return to common stockholders is known as financial leverage.

Question 46

Long-term debt secured by real estate property is a mortgage loan.

Question 47

Many "unsecured" loans that banks extend to small businesses require personal guarantees by the managers of the firm.

Question 48

Venture capitalists will invest in a small firm with the expectation of ultimately selling the company.

Question 49

Professional venture capital firms provide more investment capital for small businesses than angel capitalists.

Question 50

Common stockholders have a legally enforceable claim to dividends.

Question 51

Short-term securities have a maturity period of one to five years.

Question 52

Venture capital firms generally require a substantial return as either equity or profit.

Question 53

Small business investment companies tend to make very small investments.

Question 54

A lease is a contract that permits use of someone else's property for a specified period of time.

Question 55

From an investor's point of view, debt investments should have a higher financial return than common stock investments.

Question 56

Small firms use debt financing because interest payments are tax-deductible expenses.

Question 57

People who start a small business usually seek outside funding before using their own funds.

Question 58

Common stock is issued with a fixed par value.

Question 59

The claims of common and preferred stockholders on the assets of a firm take preference over those of the creditors in the event of default on a contractual obligation.

Question 60

Venture capitalists insist on looking at the business plan rather than the executive summary to help them make investment decisions.

Question 61

In the context of small businesses, what is bartering?

Question 62

What is the procedure to be followed by a small business owner to get a guaranteed SBA loan?

Question 63

In the context of small businesses, what is trade credit?

Question 64

Why do small firms use debt financing despite the risks involved?

Question 65

What are some of the specialized programs run by the Small Business Administration to help small businesses?

Question 66

What is the purpose of small business investment companies?

Question 67

Describe credit cards and insurance companies as sources of debt financing for small businesses.

Question 68

In the context of small firms, differentiate between common stockholders and preferred stockholders.

Question 69

Describe the guaranteed loans provided by the Small Business Administration to small business owners.

Question 70

In the context of small businesses, what is the purpose of business incubators?