Deck 15: Obtaining Debt Capital

Question 1

When sellers who offer installment payment terms to purchasers of their equipment cannot themselves finance installment,they can sell and assign that installment contract to a bank or sales finance company.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Plant improvement loans are secured only by a second mortgage on the part of the property that is being improved.

Answer 3

False

Question 4

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

Question 5

Line of credit funds are used for seasonal purposes like inventory buildup and receivable financing,frequently the largest and most financeable items on a venture's balance sheet.

Question 6

Commercial banks typically avoid existing businesses with long and substantial financial track records.

Question 7

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

Question 8

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

Question 9

Term loans are also a substitute for a series of short-term loans made with the hope of renewal by the borrower.

Question 10

To lessen the risks involved in term loans,a bank will require some restrictive covenants in loan agreements.

Question 11

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

Question 12

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

Question 13

Finance companies have reasonable prepayment penalties.

Question 14

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

Question 15

Factoring makes it possible for a loan to be increased as sales and receivables grow.

Question 16

Factoring is a cheap method for turning receivables into cash.

Question 17

Finance companies install measures in their agreements that help insure that they will not be immediately replaced by banks when a borrower's credit profile improves.

Question 18

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

Question 19

Commercial finance companies have less flexible lending arrangements than banks.

Question 20

Because of their greater risk taking and asset-based lending,finance companies usually place a larger reporting and monitoring burden on the borrowing firm to stay on top of the receivables and inventory serving as loan collateral.

Question 21

In the case of inventories or equipment,what is the amount that could be realized from an auction or quick sale called?

A) Liquidation value
B) Under value
C) Eigen value
D) Leverage value

Question 22

If a loan exceeds the limits of a local bank,part of the loan amount may be offered to _____ banks to diversify the risk profile.

Question 23

What kind of leases does not appear in the balanace sheet?

A) Domestic leases
B) Building leases
C) Auto leases
D) Operating leases

Question 24

Holding zero cash balances can prove extremely beneficial for closely held companies in the long run.

Question 25

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

A) Commercial banks
B) Government programs
C) Non-financial companies
D) Brokerage firms

Question 26

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 27

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 28

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 29

Identify a characteristic of factoring as a form of accounts receivable financing.

A) It is an inexpensive method of financing.
B) It quickly turns receivables into cash.
C) It ensures that there is no interest charged for money advanced.
D) It imposes on its users a credit agency fee.

Question 30

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 31

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

Question 32

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 33

Trade credit is reflected as _____ on a balance sheet.

A) accounts receivable
B) accounts payable
C) notes outstanding
D) goodwill

Question 34

In time-sales finance,what do dealers do when they cannot themselves finance installments or conditional sales contracts on a purchased equipment?

A) They can stall the purchase until they find means for financing.
B) They sell it off in the market for a lower price.
C) They take loans to cover their financial purposes.
D) They sell and assign the installment contract to a bank.

Question 35

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

Question 36

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

Question 37

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 38

Which of the following businesses frequently lend money to companies that do not have positive cash flow?

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

Question 39

The better the material entrepreneurs can supply to demonstrate their business credibility,the easier and faster it will be to obtain a positive lending decision.

Question 40

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

Question 41

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

Question 42

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

Question 43

Which characteristic of leasing is advantageous for high-technology and life sciences companies?

Question 44

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 45

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

Question 46

According to Babson College Adjunct Professor Leslie Charm,what should an entrepreneur look for when seeking to develop a constructive banking relationship?

Question 47

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

Question 48

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 49

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

Question 50

Banks generally have close ties to venture capital firms and will refer entrepreneurs to such firms for possible _____.

Question 51

A(n)_____ is a loan specifying the maximum amount a bank will allow the borrower for a one-year period.

Question 52

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

Question 53

What are the three distinguishing features of term loans?

Question 54

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

Question 55

For an established and financially sound company,interest rates are frequently quoted using a(n)_____ with an added premium.

Question 56

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

Question 57

Commercial finance companies lend against the _____ value of assets.