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a. her return on assets will be less if she uses debt financing. b. using
other people’s money to finance one’s business is seldom a good idea.
c. the lender will have partial control of the business. d. debt must be
repaid even if the company does not make a profit.
104. Guaranty loans are
a. made by private lenders.
b. guaranteed up to 50 percent by the SBA.
c. made through foreign banks.
d. limited to $100,000.
105. Nancy has decided to raise working capital for her upscale boutique business which currently has four locations and
is considering franchising the concept in the next few years. Because of the current company organization and anticipated
future plans, the most likely form of financing would be ________.
a. large corporations
b. private placement
c. public sale
d. underwriting
106. Connie owns a small but growing company that produces gorilla glass for smartphones. One possible source of
funding might be:
a. Dell Computers, a well-known PC manufacturer.
b. Intel, who produces computer chips.
c. Microsoft, a company that markets software applications.
d. Samsung, who sells smartphones.
107. If a Eugenie finances her firm with equity rather than debt, her net income could potentially be greater because
a. equity financing almost always leads to better firm performance than debt financing.
b. the terms of equity financing are more stable than the terms of debt financing.
c. equity financing has a positive impact on asset selection.
d. there is no interest expense.
108. Instead of borrowing money from suppliers to purchase equipment, an increasing number of small businesses are
a. obtaining trade credit instead.
b. making these purchases outright.
c. choosing to lease the equipment.
d. opting to streamline assembly processes to reduce expenditures.
109. In addition to the interest rate on his business loan, Paul should also give attention to:
a. the maturity date.
b. the reserve requirement.
c. the tax liability of the loan.
d. the LIBOR on the day the loan is approved.
110. Which type of equity-based crowdfunding will, with SEC approval, allow unaccredited investors to invest?
a. Type 1
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b. Type 2
c. Type 3
d. Soliciting investments from unaccredited investors is never allowed in crowdfunding.
Match the definition with its term.
a. 7(a) Loan Guaranty Program
b. 7(m) Microloan Program
c. Certified Development Company (CDC) Loan Program
d. Community-based financial institution
e. Formal venture capitalists
f. Informal venture capital
g. Loan covenants
h. Small Business Innovative Research (SBIR) Program
i. Small business investment companies (SBICs)
111. A lender that uses frunds from federal, state, and private sources to priovide financing to small businesses in low-
income communities
112. A loan program that helps small companies obtain financing through a guaranty provided by the SBA
113. An SBA program that helps to finance companies that plan to transform laboratory research into marketable products
114. Individuals who form limited partnerships for the purpose of raising venture capital from large institutional investors
115. Privately owned banks, regulated by the SBA, that provide long-term loans and/or equity capital to small businesses
116. An SBA loan program that provides long-term financing for small businesses to acquire real estate or machinery and
equipment
117. Funds provided by wealthy private individuals to high-risk ventures
118. An SBA program that provides short-term loans of up to $50,000 to small businesses and not-for-profit child-care
centers
Match the term with its definition.
a. Asset-based loan
b. Basis point
c. Chattel mortgage
d. Equipment loan
e. LIBOR (London InterBank Offered Rate)
f. Line of credit
g. Prime rate
h. Purchase-order financing
i. Term loan
119. An informal agreement between a borrower and a bank as to the maximum amount of funds the bank will provide an
any one time
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120. Money loaned for a 5-to 10-year term, corresponding to the length of time the investment will bring in profits
121. An installment loan from a seller of machinery used by a business
122. 1/100th of 1 percent when quoting an interest rate
123. Obtaining cash from a lender who, for a fee, advances the amount of the borrower’s cost of goods sold for a specific
customer order
124. The interest rate chareged by commercial banks on loans to their most creditworthy customers
125. A line of credit secured by working capital assets
126. The interst rate charged by London banks on loans to other London banks
Match the term with its definition.
a. Balloon payment
b. Business angels
c. Chattel mortgage
d. Crowdfunding
e. Factoring
f. Initial public offering
g. Loan covenants
h. Private placement
i. Real estate mortgage
j. Venture capitalist
127. Obtaining cash by selling accounts receivable to another firm
128. Private individuals who invest in others’ entrepreneurial ventures
129. Bank-imposed restrictions on a borrower that enhance the chance of timely repayment
130. A long-term loan with real property held as collateral
131. A very large payment required about halfway through the term over which payments were calculated, repaying the
loan balance in full
132. The issuance of stock to be traded in public financial markets
133. The sale of a firm’s capital stock to select individuals
134. A loan for which items of inventory or other movable property serve as collateral
135. The process of raising very small investments from a large number of investors via the Internet
136. Marla runs a not-for-profit daycare center in her home located in a rural area. She is in need of $10,000 to purchase
inventory, supplies and equipment. What Small Business Administration program would be the best fit for Marla’s
situation and why?
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137. Luke has a new company and is considering equity financing. Currently, Luke is the only owner and source of
equity for the business and makes all executive decisions for daily operations. What effect could the addition of other
investors have?
138. What are the tradeoffs between profitability, risk, and control that should be considered when choosing between debt
and equity?
139. What are the four basic factors that determine how a firm is financed?
140. Discuss suggestions for an entrepreneur who is considering asking family or friends for financing.
141. Describe four different loan covenants that a bank may impose on a loan
142. Frankie is looking for sources of financing for his new tour company. At this time, he would like to keep his
financing close to home but eventually apply for bank financing. What are Frankie’s financial support options?
143. What should an entrepreneur do before approaching an investor?
144. Violet’s Catering is growing rapidly. A new customer has requested the company cater a retirement luncheon for 500
persons resulting in Violet’s Catering needing a large order from the company’s primary food vendor. Although the
company is experiencing growth, cash flow is a concern. What would be the best financing option?
145. Janice loves to cook and go backpacking, and she had an idea for a backpacking cookbook that would combine
ultralight ingredients into interesting and appetizing meals. However, she needs the money to research and test the recipes
as well as cover printing and marketing expenses. How could Janice use the different crowdfunding options, donations,
rewards, pre-purchase, or equity-based, to finance her cookbook?
146. List the “5 C’s of Credit” and explain their impact on borrowing ability.
147. What key terms should an entrepreneur understand so as to be prepared for loan negotiation?
148. Allie is starting a purse business and has been approached by Renee, a business angel, about investing in the
company. Discuss items Allie should consider before going into business with Renee.
149. Gina owns a clothing resale store in a low-income neighborhood. Since opening, the store has hired five employees
and is making a small profit. The store is the only business in her area and often sponsors fundraisers at the location. Since
the store is in need of expansion capital, what type of funding should Gina to and why?
150. Discuss two methods of selling stock.
151. Discuss business traits that business angels look for in prospective investments. What are typical motivations?
152. Discuss reasons a business would lease as opposed to purchasing equipment.
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Answer Key
1. True
2. True
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52. a
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128. b
129. g
130. i
131. a
132. f
133. h
134. c
135. d
136. The 7(m) Microloan Program would be the best for Marla’s business. It grants short-term loans up to $35,000 to not–
for-profit child care centers for working capital related to her specific needs. The SBA guarantees or makes a loan to an
intermediary who then makes the loan to the applicant. The lender also will provide training and support programs to
Marla.
137. The addition of investors will have financial and voting effects on the company’s operations. Financial effects
include how monies would be divided if the company is profitable meaning Luke would have to share these profits. If the
company is not profitable, an equity investor cannot demand more than what is earned in profits. Voting control changes
with equity financing resulting in Luke giving up some control. Since many owners of small firms resist giving up control
to outsiders, Luke must decide if he can accept this trade off for the additional money to operate the business. Since
financing with debt has issues as well, Luke should decide if the risk is worth not having as much control of the company.
138. Borrowing money rather than issuing common stock increases the potential for higher rates of return to the owners.
Taking on debt instead of issuing stock also allows the owner(s) to retain voting control of the company. However, debt
represents a fixed obligation to repay and a schedule for repayment and thus increases the risk of the firm. Owners who
decide to issue stock instead of increasing debt will proportionately reduce the risk of the firm, but they will also limit
their potential for returns and give up some voting control. There are clearly tradeoffs between the two options.
139. The four basic factors that determine how a firm is financed are:
∙ The firm’s economic potential.
∙ The nature of the firm’s assets.
∙ The maturity of the firm.
∙ The personal preferences of the owner(s) with respect to the tradeoffs between debt and equity.
140. To minimize the chance of damaging important personal relationships, the entrepreneur should
– Only accept money from a friend or relative if that person will not be hurt financially to any significant extent if the
entire amount is lost.
– Plan to repay such loans as soon as possible.
– Put any agreements in writing.
– Try to secure investments or loans from unbiased outside sources to show the money is an investment as opposed to a
gift.
– Do so very cautiously.
– Do it if necessary.
– Be careful and meticulously clarify expectations.
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141.
1. A bank will usually require that the business provide financial statements on a monthly basis or, at the very least,
quarterly.
2. The bank may limit managers’ salaries. It also may prohibit any personal loans from the business to the owners.
3. A bank may put limits on various financial ratios to make certain that a firm can handle its loan payments.
4. The borrower will normally be required to personally guarantee the firm’s loan.
142. Frankie could use the following three sources.
– First utilize personal savings. Since Frankie wants to apply for bank financing in the future, the bank will want to see his
personal investment into his company before they lend any funds.
– Borrow money from friends and family. This source is a quick and available source of revenue because lending is based
more on personal relationships rather than financial analysis.
– Open a credit card for business financing. Although this method is not the typically recommended option, it is available
although interest costs may become overwhelming.
143. Clean up personal credit.
Identify the company’s management team.
Write an effective business plan.
Decide what type of outside financing is needed.
Do careful research on potential investors.
144. Violet’s Catering needs to determine if purchase-order financing is feasible. The lender would advance the amount of
the company’s cost of goods sold less a fee, typically between 3 and 8 percent. As long as the gross profit margin is at
least 35 percent, Violet’s Catering might be able to obtain financing for the entire process. The fee is somewhat large, but
it is worth being able to accept an order from a large customer. For Violet’s Catering, the new customers also a potential
repeat customer.
As an alternative, Violet may request a down payment from the customer as a show of good faith. This amount probably
would not cover the entire cost of food, but it would give her some negotiating power with her vendor for special terms
for this one order.
145. Janice could set up an account and solicit donations. If she has few funds to begin with, this would be cheapest
option. She could offer free recipes or food packing tips as a reward option. She could also offer the final cookbook under
the pre-purchase arrangement. Under the equity-based option, she would have to attract accredited investors, which would
be unlikely for a cookbook.
146. The “five C’s of credit” are:
∙ The borrower’s character. Banks look for strong character and reasonabe ability.
∙ The borrower’s capacity to repay the loan. The lender wants some assurance there will be a steady flow of cash from
the business to provide repayment.
∙ The capital being invested in the venture by the borrower. Lenders want borrowers to have a personal interest in the
form of invested capital that is at risk in the business.
∙ The conditions of the industry and economy. Lenders look for trends that indicate the business is likely to succeed.
∙ The collateral available to secure the loan. Lenders prefer their interests be protected by collateral that can be
recovered and sold if necessary to recoup their principal.
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