Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
Chapter 17 Sources of Debt Financing
1) 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.
Topic: Introduction
AACSB: Reflective Thinking
2) For small businesses, ________ are the heart of the financial market.
A) banks
B) finance companies
C) private placement
D) insurance companies
Topic: Commercial Banks
AACSB: Analytic Skills
3) 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.
Topic: Commercial Banks
AACSB: Analytic Skills
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.
Topic: Commercial Loan
AACSB: Analytic Skills
1
5) 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
Topic: Lines of Credit
AACSB: Analytic Skills
6) 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
Topic: Lines of Credit
AACSB: Reflective Thinking
7) ________ is (are) 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
Topic: Floor Planning
AACSB: Analytic Skills
8) 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
Topic: Floor Planning
AACSB: Analytic Skills
2
9) Term loans impose restrictions called:
A) loan boundaries.
B) covenants.
C) financial limits.
D) margins.
Topic: Term Loans
AACSB: Analytic Skills
10) Term loans often have a ________ feature, which means that after three to five years, the full
amount of principal is due before the amortized payments fully repay the loan.
A) parachute
B) covenant
C) balloon
D) handcuff
Topic: Term Loans
AACSB: Analytic Skills
11) 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
Topic: Asset-Based Lenders
AACSB: Analytic Skills
12) 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.
Topic: Asset-Based Lenders
AACSB: Analytic Skills
3
13) 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
Topic: Asset-Based Lenders
AACSB: Analytic Skills
14) The most common form of secured credit is:
A) accounts receivable financing.
B) inventory financing.
C) floor planning.
D) discounted installment contracts.
Topic: Discounting Accounts Receivable
AACSB: Analytic Skills
15) ________ is (are) an asset-based financing technique.
A) Discounted installment contracts
B) Inventory financing
C) Installment lending
D) Floor planning
Topic: Inventory Financing
AACSB: Analytic Skills
16) 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
Topic: Inventory Financing
AACSB: Analytic Skills
4
17) 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.
Topic: Asset-Based Lenders
AACSB: Analytic Skills
18) 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
Topic: Trade Credit
AACSB: Analytic Skills
19) 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
Topic: Trade Credit
AACSB: Reflective Thinking
20) 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.
Topic: Commercial Finance Companies
AACSB: Analytic Skills
5
21) 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.
Topic: Commercial Finance Companies
AACSB: Analytic Skills
22) In contrast to traditional lenders, finance companies offer small business borrowers:
A) faster turnaround times.
B) longer repayment schedules.
C) more flexible payment plans.
D) All of the above
Topic: Commercial Finance Companies
AACSB: Analytic Skills
23) 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.
Topic: Stock Brokerage Houses
AACSB: Analytic Skills
24) 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.
Topic: Insurance Companies
AACSB: Analytic Skills
6
25) 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
Topic: Insurance Companies
AACSB: Reflective Thinking
26) 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
Topic: Credit Unions
AACSB: Analytic Skills
27) 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.
Topic: Bonds
AACSB: Analytic Skills
28) 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
Topic: Bonds
AACSB: Reflective Thinking
7
29) 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
Topic: Private Placements
AACSB: Reflective Thinking
30) 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.
Topic: Private Placements
AACSB: Analytic Skills
31) 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.
Topic: Small Business Investment Companies (SBICs)
AACSB: Analytic Skills
32) 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.
Topic: Small Business Investment Companies (SBICs)
AACSB: Analytic Skills
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33) SBICs may lend up to ________% of their private capital to a single client.
A) 10
B) 30
C) 20
D) 49
Topic: Small Business Investment Companies (SBICs)
AACSB: Analytic Skills
34) 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.
Topic: Small Business Investment Companies (SBICs)
AACSB: Analytic Skills
35) SBICs must invest at least ________ percent of their capital in smaller businesses, which are
defined by the SBA as those with a tangible net worth of less than $6 million and an average of
$2 million in net income over the previous two years at the time of investment.
A) 75
B) 60
C) 25
D) 50
Topic: Small Business Investment Companies (SBICs)
AACSB: Analytic Skills
36) 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.
Topic: Economic Development Administration (EDA)
AACSB: Analytic Skills
9
37) 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.
Topic: Department of Housing and Urban Development (HUD)
AACSB: Analytic Skills
38) 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.
Topic: U.S. Department of Agriculture’s Rural Business-Cooperative Service
AACSB: Analytic Skills
39) 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
Topic: Small Business Innovation Research (SBIR) Program
AACSB: Analytic Skills
40) 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
Topic: Small Business Administration (SBA)
AACSB: Analytic Skills
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