Deck 9: Small Business Finance

Question 1

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

Answer 1

False

Question 2

A demand note allows the business to borrow and repay funds up to the maximum amount specified in the agreement throughout the year.

Answer 2

False

Question 3

Commercial banks are the backbone of the credit market.

Answer 3

True

Question 4

Ordinarily,the longer the maturity of the loan,the higher the rate of interest.

Question 5

A positive covenant spells out what a borrower cannot do when signing a loan agreement.

Question 6

The prime rate is defined as the rate of interest banks charge their "best" customers.

Question 7

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

Question 8

Until the debt is repaid,the creditor has a legal claim on a portion of the cash flows of the business.

Question 9

A lender may require a compensating balance,which means that the amount of funds is reduced,causing the rate of interest to increase,since the same amount of interest is paid and fewer funds are available.

Question 10

Two types of funds are available to the entrepreneur: debt and equity.

Question 11

In most cases,the sheer strength of a business idea can win full funding for a venture.

Question 12

A fixed-rate loan typically has a higher interest rate than the initial rate on a variable-rate loan.

Question 13

"Crowdfunding" and its use of online sites to finance business start-ups was made illegal by the Business Startups Act of 2012.

Question 14

Leverage can enable a small business owner to magnify the potential returns expected.

Question 15

The decision to seek outside funds,either through debt or equity,is relatively unimportant and simple.

Question 16

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

Question 17

Most lenders are hesitant to make loans to startup businesses unless a wealthy friend or relative will cosign the loan.

Question 18

Today,a credit score of 580-690 is necessary for an individual to obtain a business loan.

Question 19

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 20

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

Question 21

Government lending programs exist to stimulate small businesses.

Question 22

If a small business uses its receivables as collateral for a loan in the process known as pledging,the finance company will collect the accounts receivable.

Question 23

The fundamental financial building blocks for an entrepreneur 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 24

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 25

Venture capital firms rarely invest in high-tech industries.

Question 26

Floor planning is a special type of a loan used for financing high-priced inventory like new cars and trucks.

Question 27

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 28

About 40 percent of the plans submitted to venture capital firms are ultimately funded.

Question 29

If a lender says no to a small business loan application,it is acceptable to ask whether the bank can rework the application so that it meets the lending criteria.

Question 30

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 31

There is no such thing as a guaranteed loan - especially with the SBA.

Question 32

Term insurance policies have no borrowing capacity.

Question 33

Most new businesses are originally financed with the personal funds of the small business owner.

Question 34

The 504 Loan Program provides small businesses with funding for fixed assets through a certified development company when conventional loans are not possible.

Question 35

Factoring has historically been viewed as one of the most desirable approaches to financing.

Question 36

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 37

The most active government lender is the Small Business Administration.

Question 38

Most lenders will expect entrepreneurs to provide equity funds in an amount of at least 35 percent of the business before approving the loan.

Question 39

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 40

Micromanagement angels own and operate their own business and are looking for ways to diversify their portfolios.

Question 41

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 42

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 43

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

A) Interest
B) Principal
C) Maturity length
D) Debt

Question 44

The rate of interest charged to a banks "best" customers is referred to as

A) Fixed rate
B) Dividend rate
C) Grade A rate
D) Prime rate

Question 45

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 Cs?

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

Question 46

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 47

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

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

Question 48

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 49

All but which of the following determines the size and extent of the obligation to the creditor?

A) Amount of principal borrowed
B) The loan's interest rate
C) The market interest rate
D) The loan's length of maturity

Question 50

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 "Cs" of credit?

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

Question 51

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 52

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 53

All but which of the following are elements of the five Cs of credit?

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

Question 54

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 55

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 56

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 57

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 58

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

A) Lower
B) No effect on
C) Higher
D) Better

Question 59

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

Question 60

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

A) Equity
B) Leverage
C) Capital
D) Liabilities

Question 61

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

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

Question 62

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 63

All but which of the following are the most common types of loans provided by commercial finance companies?

A) Leasing
B) Floor planning
C) Balloon notes
D) Factoring accounts receivable

Question 64

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 65

The two types of loan endorsers are

A) Borrowers and guarantors
B) Guarantors and comakers
C) Borrowers and lenders
D) Comakers and borrowers

Question 66

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 67

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 68

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 69

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 70

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 71

____ refers to the intervals at which interest is paid.

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

Question 72

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 73

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 74

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

A) Principal
B) Interest rates
C) Maturity
D) Collateral

Question 75

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 76

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 77

____ 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 78

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 79

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 80

All but which of the following are the three primary factors that providers of equity financing are interested in?

A) Dividends
B) Voice in the management of the business
C) Increased value of the business
D) Payroll expense