Deck 15: Sources of Debt Financing

Question 1

The most common form of secured credit is:

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

Answer 1

A

Question 2

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

Answer 2

C

Question 3

The ________ loan is based not on creditworthiness,but on the borrower's reputation and reliability.

A)line of credit
B)discounted installment contract
C)character
D)SBA

Answer 3

C

Question 4

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 5

________ is 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

Question 6

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 7

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 8

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 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

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 11

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

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

Question 12

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.

Question 13

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 14

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 15

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 16

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 17

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

Question 18

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 19

________ is/are an asset-based financing technique.

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

Question 20

Term loans impose restrictions called:

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

Question 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

Savings and loan associations typically specialize in loans for:

A)equipment.
B)inventory.
C)real property.
D)accounts receivable.

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

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 33

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

A)10
B)30
C)20
D)40

Question 34

A ________ makes only intermediate and long-term SBA guaranteed loans.It specializes in loans many banks would not consider.

A)small business investment company
B)local development company
C)small business lending company
D)MESBIC

Question 35

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 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

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 38

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 39

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 40

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 41

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 42

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 43

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 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 maximum amount of a disaster assistance loan is ________ dollars

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

Question 46

A ________ 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 47

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

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

Question 48

Typical short term loans are for:

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

Question 49

________ were created by the SBA in 1992 to provide loans under $35,000 that are normally shunned by banks.

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

Question 50

The loan ceiling for the International Trade Loan Program is

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

Question 51

________ 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 52

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 53

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 54

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 55

The majority of loans provided by the SBA are:

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

Question 56

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 57

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 58

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 59

The average interest rates on SBA-guaranteed loans is:

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

Question 60

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 61

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

Question 62

Banks may make "character loans" when the small business is able to pledge installment contracts as collateral.

Question 63

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

Question 64

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

Question 65

Commercial banks are lenders of last resort for small businesses.

Question 66

It is important for the small business owner to stay in communication with his/her banker by visiting,sending customer mailings to him/her,and even sending samples of new products.

Question 67

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 68

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

Question 69

Typically,a minimum loan amount from a Savings & Loan is:

A)$10,000.
B)$30,000.
C)$50,000.
D)$100,000.

Question 70

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

Question 71

Character loans typically require the following from the business owner:

A)financial statements.
B)tax returns.
C)evaluations.
D)None of the above

Question 72

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 73

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

Question 74

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

Question 75

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

Question 76

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

Question 77

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 78

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

Question 79

A line of credit is usually secured by collateral.

Question 80

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