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Entrepreneurship: Starting & Operating a Small Business, 4e (Mariotti)
Chapter 10 Financing Strategy and Tactics
1) Statistics indicate that 45 percent of all small businesses ________.
A) survive ten plus years
B) fail after three years
C) survive five or more years
D) fail after the first year
Learning Object.: 10.1 Assess your financing preferences.
AACSB Category: Analytical thinking
2) Business failure is defined by Dun and Bradstreet as “business termination ________.”
A) with no notice
B) because of owner illness
C) with losses to creditors
D) with loss of sales in three continuous quarters
Learning Object.: 10.1 Assess your financing preferences.
AACSB Category: Analytical thinking
3) The amount of risk or threat of loss that an entrepreneur is willing to sustain is ________.
A) risk acceptance
B) risk tolerance
C) risk aversion
D) risk allowance
Learning Object.: 10.1 Assess your financing preferences.
AACSB Category: Reflective thinking
4) Raising money for a business is an aspect of ________, which is the use of money for a
purpose.
A) comparative advantage
B) equity analysis
C) surety sequencing
D) financing
Learning Object.: 10.1 Assess your financing preferences.
AACSB Category: Reflective thinking
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5) Financing with earnings is an option under what circumstances?
A) A company has no debt and is growing.
B) A company is profitable and has positive cash flow from operations.
C) A company is profitable and has negative cash flow from operations.
D) A company has substantial cash savings and marketable securities.
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
6) What do you have to do before you can sell stock in your business?
A) hold an initial public offering
B) register
C) incorporate
D) seek an attorney’s help
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
7) Financing a corporation with debt means borrowing or ________.
A) taking a loan on a credit card
B) borrowing from the entrepreneur’s personal accounts
C) lending money to customers
D) selling bonds
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
8) An investor who invests money into your business in exchange for equity receives ________.
A) a monthly dividend out of the business profits
B) liability for any debt the business incurs
C) a share of ownership of the business
D) annual dividends
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
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9) ________ are forms of gifts or grants to businesses.
A) Tax abatements
B) Tax credits
C) Unpaid labor by friends and family
D) All of the above.
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
10) You could borrow money from friends and family who would like to invest in your business,
or you could offer them ________.
A) equity
B) a bonus
C) debt
D) a job
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
11) The three common ways for a business to raise the capital it needs to grow are with earnings,
equity, and debt.
Learning Object.: 10.2 Compare the types of business financing.
AACSB Category: Analytical thinking
12) How is financing with equity different from financing with debt?
Answer:
1) Financing with debt – The entrepreneur can borrow money from an investor and promise to
pay it back over a set period of time and at a set rate of interest. Corporations sell debt in the
form of bonds. Similarly, an owner of a small business can borrow money to finance the
2) Financing with equity – The entrepreneur trades a percentage of ownership in the business in
exchange for money invested into the business. The investor receives a percentage of future
profits from the business based upon the percentage of ownership. Corporations sell equity in the
form of stock. An entrepreneur cannot sell stock unless the business is incorporated, but he or
she can sell equity. The entrepreneur can offer ownership and a share of future profits in
exchange for financing.
Learning Object.: 10.2 Compare the types of business financing.
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17) The lender has no say in the management or direction of the business, as long as the loan
payments are made and contracts are not violated.
Learning Object.: 10.3 Evaluate the pros and cons of debt and equity financing.
AACSB Category: Analytical thinking
18) Which of the following is not one of the “Five C’s of Borrowing?”
A) certainty
B) collateral
C) character
D) conditions
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Reflective thinking
19) ________ accounts are credit accounts that have a single borrowing limit and may be used
and repaid on a repeated cycle.
A) Charge
B) Loan
C) Checking
D) Savings
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
20) The amount you will have to pay over a given period of time until the loan is repaid is called
________.
A) payback
B) principal
C) present value
D) debt service
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
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21) Which of the following is not a type of community development loan fund?
A) community development banks
B) public employee credit union
C) community development credit unions
D) venture capital
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
22) If you are a small business owner looking for a loan, a bank will expect you to ________.
A) find equity investors to spread the bank’s risk
B) incorporate in order to maximize cash flow
C) personally guarantee that you will be responsible for the business loan
D) incorporate in order to avoid taxation
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
23) ________ is property or other assets pledged against the loan that the lender can take and sell
if the loan is not repaid.
A) Equity
B) Collateral
C) Asset
D) Guarantee
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
24) Venture capitalists can make their money by ________.
A) selling their percentage share of the business to another investor
B) waiting until the company “goes public” and converting their shares into stock, which can
then be traded on the stock market
C) Either of the above.
D) Neither of the above.
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
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25) Methods of bootstrap financing include ________.
A) getting suppliers to extend you credit terms
B) using temporary help rather than permanent employees
C) working from home or borrowing office space
D) All of the above.
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
26) No matter what way you approach raising money for your business, you will need a
________.
A) written business plan
B) family investment
C) winning lottery ticket
D) bank loan
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Reflective thinking
27) Some federal agencies provide grants, loans, and/or loan guarantees for businesses that meet
specific criteria. One of these is the United States ________.
A) Interstate Commerce Commission (ICC)
B) Small Business Administration (SBA)
C) Federal Land Bank (FLB)
D) Agricultural Extension Agency (AEA)
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
28) Lender financing occurs when a business establishes trade credit with the lender.
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
29) Who are venture capitalists? How do they get their returns?
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
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30) Why might a bank be more willing to loan money to a large successful company than to a
start-up business?
Learning Object.: 10.4 Identify sources of capital for your business.
AACSB Category: Analytical thinking
31) There are many sources of capital to start a business. What are they?
1) Family and friends can loan you money (debt) or take an ownership position (equity) in your
6) Small Business Investment Companies (SBICs can lend money, debt.)
7) Community development financial institutions (CDFIs) may make equity, near equity and
8) Personal savings and other resources are the best starting point.
Learning Object.: 10.4 Identify sources of capital for your business.
1) Collateral – A banker will want to see you pledge property or assets against a loan, so that the
2) Character – Usually this is translated into credit history. A banker wants to see how you have
handled credit (debt) in the past. Your history of borrowing money is captured in your credit
3) Capacity – A banker will want to see that the business generates enough income to pay off the
debt. A banker wants to see projected cash flow statements to ensure that you will be generating
4) Capital – A banker will evaluate how much of your money is invested in the business. A
5) Conditions – Bankers will evaluate overall economic conditions as part of the analysis of your
loan.
Learning Object.: 10.4 Identify sources of capital for your business.
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37) Bonds are a form of ________.
A) debt financing
B) equity financing
C) Both of the above
D) None of the above.
Learning Object.: 10.5 Appraise stocks and bonds as investment alternatives.
AACSB Category: Analytical thinking
38) The equity investor’s risk is ________ that of the debt lender.
A) much lower than
B) lower than
C) the same as
D) higher than
Learning Object.: 10.5 Appraise stocks and bonds as investment alternatives.
AACSB Category: Reflective thinking
39) High risk = high reward and conversely, low risk = low reward.
Learning Object.: 10.5 Appraise stocks and bonds as investment alternatives.
AACSB Category: Reflective thinking
40) A discount, when speaking of bonds, is the difference between a bond’s trading price and its
par value when the trading price is below par.
Learning Object.: 10.5 Appraise stocks and bonds as investment alternatives.
AACSB Category: Analytical thinking