Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough)
Chapter 13 Sources of Financing: Debt and Equity
1) Entrepreneurs needing between $100,000 and $3 million in the current financial environment
will likely find acquiring financing to be:
A) challenging.
B) confusing.
C) attainable.
D) easy.
2) Unlike entrepreneurs of the past, today’s entrepreneurs:
A) are finding more government interest and funding for business start-ups than in the past
decade.
B) find fewer closed doors as small business start-ups have become less risky.
C) have to piece their capital together from several sources.
D) are spending a smaller percentage of their time raising capital for their businesses.
3) When searching for capital to launch their companies, entrepreneurs should remember several
“secrets” to successful financing. Which of the following is not one of those secrets?
A) Choosing the right sources of capital can be just as important as choosing the right form of
ownership or the right location.
B) The money is out there, but the key is knowing where to look.
C) Creativity counts when searching for financing.
D) Raising money should not take very long; therefore, if it does not come quickly, it probably
will not come at all.
4) The Kauffman Foundation reports that the average amount of capital that entrepreneurs use to
start small businesses in the U.S. is nearly:
A) $25,000.
B) $50,000.
C) $80,000.
D) $100,000.
5) Which of the following represents capital?
A) Inventory
B) Equipment and machinery
C) Cash
D) All of the above
6) The primary disadvantage of equity capital is that the entrepreneur:
A) must repay it at some point with interest.
B) must give up some-perhaps most-of the ownership in the business to outsiders.
C) experiences the disadvantage of the risk/return tradeoff in the form of higher interest rates.
D) B and C above
7) The primary advantage of equity capital is:
A) its lower interest rate.
B) that it is readily available to a large number of entrepreneurs from a variety of lenders.
C) that it does not have to be repaid like a loan does.
D) that it does not appear on a company’s balance sheet.
8) Entrepreneurs are most likely to give up more equity in their businesses in the ________
phase of their companies than in any other.
A) startup
B) product development
C) product testing
D) product shipping
9) The first place an entrepreneur should look for startup capital is:
A) a bank.
B) a venture capitalist.
C) the Small Business Administration.
D) his own savings.
10) A method of raising capital that taps the power of social networking and allows
entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web
sites and raise money from ordinary people who invest as little as $100 is called:
A) crowd funding.
B) angel financing.
C) venture capital.
D) bootstrapping.
11) The largest single source of external equity capital for small businesses is:
A) angels.
B) venture capitalists.
C) Small Business Administration loans.
D) the stock market; i.e., “going public.”
12) When looking for an angel, the key is:
A) networking.
B) waiting until you need the money.
C) looking across industries.
D) using computer matches.
13) Angels are an excellent source of ________ money, often willing to wait ________ years or
longer to cash out their investment.
A) immediate; 5
B) patient: 7
C) long-term; 10
D) passive; 20
14) The general trend of angel financing is that it has ________ as a source of capital for
entrepreneurs over the past 9 years.
A) increased
B) stabilized
C) decreased
D) disappeared
15) Which of the following is not a characteristic of a typical angel investor?
A) Investing money locally
B) Purchasing majority ownership in the company
C) Investing in the startup phase of the company
D) Willing to wait seven years or more to cash out an investment
16) Before entering into any partnership arrangement, entrepreneurs must consider:
A) the partnership will only have an impact on sharing profits.
B) what interest rate the partner is expecting.
C) the impact of giving up some personal control and sharing profits with others.
D) the ramifications of having another person on the payroll.
17) A/An ________ is a private, for-profit organization that purchases equity positions in young
businesses that will potentially produce returns of 300 to 500 percent over five to seven years.
A) commercial bank
B) venture capital company
C) angel
D) SB-1 filing
18) The average venture capital firm screens about ________ investment proposals each year
and ultimately invests in ________ of them.
A) 10,000; 12
B) 1,000; 1
C) 5,000; 13
D) 5,000; 80
19) Although there is no limit on the amount of stock it can buy, a typical venture capital firm
will purchase less than ________ percent of the ownership in a small firm.
A) 21
B) 50
C) 70
D) 80
20) Venture capitalists look for ________ as the most important ingredient in the success of any
business.
A) innovation
B) a growth industry
C) a competitive edge
D) competent management
21) When evaluating a company as a potential investment target, venture capitalists look for all
but which of the following?
A) A competent management team
B) Potential for high returns
C) Convenient and profitable exit strategy
D) Stable industry
22) Approximately ________ percent of all venture capital invested comes from corporations.
A) 2
B) 8
C) 14
D) 24
23) A(n) ________ is when a company raises capital by selling shares of its stock to the general
public for the first time.
A) venture capital offering
B) partnership
C) debt equity arrangement
D) initial public offering
24) Less than ________ percent of all U.S. companies are publicly held corporations.
A) 1
B) 5
C) 10
D) 12
25) The biggest benefit of a public stock offering is:
A) the capital infusion the company receives.
B) the ability to use its stock to acquire other companies.
C) a listing on a stock exchange.
D) the ability to use its stock to attract and retain key managers and employees.
26) Investment bankers who underwrite public stock offerings typically look for all but which of
the following characteristics in a small company?
A) A strong record of earnings
B) A solid position in a stable market
C) Consistently high growth rates
D) A sound management team with experience and a strong board of directors
27) In an initial public offering, the underwriter, or investment banker, serves to:
A) advise and help prepare the company’s registration statement for the SEC.
B) determine the price of the shares issued in the offering.
C) sell the company’s stock through an underwriting syndicate of other investment bankers it
develops.
D) All of the above
28) The single most important ingredient in making a successful public offering is:
A) choosing a capable underwriter.
B) negotiating a favorable letter of intent.
C) preparing a suitable registration statement.
D) filing Regulation D with the SEC.
29) The document outlining the details of the agreement between the entrepreneur and the stock
underwriter is called:
A) Regulation D.
B) a “blue sky” agreement.
C) the letter of intent.
D) the registration statement.
30) The “wait to go effective” is the time period when:
A) the SEC registration statement is being prepared.
B) the underwriter decides what regulation to file under.
C) the firm prices the stock for the offering.
D) the company is waiting for SEC approval after filing the registration statement.
31) The formal underwriting agreement between the company and the underwriter is signed:
A) on the last day before the registration statement becomes effective.
B) when the statement of registration is filed.
C) during the road show.
D) at the time of the letter of intent.
32) Typically, the entire process of going public takes ________, but it can take much longer if
the issuing company is not properly prepared for the process.
A) 30 days
B) 6 months
C) 120 to 180 days
D) one year
33) The goal of the SEC’s Regulation S-B and S-K is:
A) to discourage small companies from trying to “go public.”
B) to make it easier for the SEC to detect companies whose stock would be bad investments for
consumers.
C) to open the doors to capital markets to smaller companies by cutting the paperwork and the
costs normally required to make a public offering.
D) to make the standards for making a public stock offering more stringent.
34) To be eligible for the simplified registration process under Regulation S-B and S-K, a
company must:
A) be based in either the United States or Canada.
B) have revenues of less than $25 million.
C) have outstanding securities of less than $25 million.
D) All of the above
35) In a Regulation D stock offering, the company:
A) sells its shares directly to private investors.
B) makes a private placement without actually “going public.”
C) does not have to register its shares with the SEC.
D) All of the above
36) To qualify for a Rule 147 (intrastate) public stock offering, a company must ________ in the
state in which it makes this offering.
A) be incorporated and maintain its executive offices
B) derive 80 percent of its revenue
C) use 80 percent of the offering proceeds for business
D) All of the above
37) Because of the risk/return tradeoff, small businesses that borrow money repay it with interest
at the:
A) prime interest rate.
B) prime interest rate minus a few percentage points.
C) prime interest rate plus a few percentage points.
D) lender’s cost of capital.
38) For small businesses, ________ are the very heart of the financial market, providing the
greatest number and variety of loans to small companies.
A) commercial banks
B) factors
C) commercial finance companies
D) credit unions
39) The recent turbulence in the financial markets has caused banks to ________ their lending
standards, making it ________ for small businesses to qualify for loans.
A) tighten; easier
B) tighten; more difficult
C) relax; easier
D) relax; more difficult
40) Commercial banks provide ________ of loans to small business.
A) very few
B) about 50 percent
C) the greatest number and variety
D) more than 89 percent
41) Before making a loan to a business startup, banks prefer to see:
A) sufficient cash flow generated by the business.
B) ample collateral for the loan amount.
C) an SBA guarantee to insure the loan.
D) All of the above
42) The most common type of commercial bank loan granted to small businesses is:
A) the short-term loan.
B) the line of credit agreement.
C) floor planning.
D) the unsecured term loan.
43) Entrepreneurs basically “borrow from themselves” by pledging their ________ as collateral
for the loans they receive in a ________ .
A) business; commercial loan
B) business assets; home equity loan
C) home; home equity loan
D) big ticket items; floor loan
44) 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
45) The Tanning Parlor is in the middle of the busy season. Owner Sunny Bright has hired extra
help and encountered some unexpected repairs that have left her short of operating capital. What
type of financing would Sunny most likely use in this situation?
A) A line of credit
B) Floor planning
C) A discounted installment contract
D) Trade credit
46) ________ is a method of financing frequently used by retailers of “big ticket items” such as
autos.
A) Discounted installment contracts
B) Trade credit
C) Installment loans
D) Floor planning
47) The Boat and Ski Shop, a small retail boat shop, would most likely rely on which of the
following methods to finance its inventory?
A) Discounted installment contracts
B) Floor planning
C) Installment loans
D) Trade credit
48) A bank loan that imposes restrictions or covenants on the business decisions an entrepreneur
makes concerning the company’s operations is called a:
A) home equity loan.
B) floor planning.
C) term loan.
D) line of credit.
49) A term loan:
A) is typically unsecured.
B) may contain restrictions or covenants.
C) is based on past operating history and a firm’s high probability of repayment.
D) All of the above
50) 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) profitability based.
51) Asset-based borrowing permits small businesses:
A) to borrow up to 100 percent 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 such as accounts receivable and inventory.
C) to obtain loans more easily but with less borrowing power than using unsecured lines of
credit.
D) access to a source of funds ideally suited for long-term financing needs.
52) 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
53) Which of the following is not an asset-based financing technique?
A) Discounting accounts receivable
B) Inventory financing
C) Term loan
D) None of the above
54) A company pledging its inventory, accounts receivables, or fixtures as collateral for a loan is
using:
A) floor planning.
B) asset-based financing.
C) trade credit.
D) margin loan.
55) The advance rate on inventory-based loans is usually between 10 to 50 percent, but a
business pledging high-quality accounts receivable as collateral may be able to negotiate up to an
________ percent advance rate.
A) 55
B) 65
C) 75
D) 85
56) In discounted accounts receivable financing, a small business can typically borrow an
amount equal to ________ percent of its receivables it pledges as collateral.
A) 10 – 25
B) 35 – 55
C) 55 – 85
D) 80 – 95
57) In inventory financing, a small business can typically borrow an amount equal to ________
percent of the inventory it pledges as collateral.
A) no more than 50
B) 70 to 80
C) 85 to 90
D) 90 to 100
58) Financing through ________ is similar to trade credit and this source of financing offers
reasonable credit terms with only a modest down payment with the balance financed over the life
of the purchase.
A) vendor financing
B) equipment suppliers
C) savings and loan associations
D) margin loans
59) The loans from commercial finance companies to small businesses:
A) tend to be for smaller amounts than those from commercial banks, and at lower interest rates.
B) are based on the strength of the small companies’ earning power.
C) tend to be at lower interest rates than those from commercial banks and are much harder to
qualify for.
D) are often similar to the types of loans commercial banks offer, but commercial finance loans
usually carry higher interest rates.
60) Savings and loan associations typically specialize in loans for:
A) equipment.
B) inventory.
C) real property.
D) accounts receivable.
61) A margin loan:
A) is one made by a commercial bank to a small business whose financial performance is
marginal.
B) carries much higher rates because the collateral supporting it is so risky.
C) is a loan from an entrepreneur’s stockbroker that uses the entrepreneur’s investment portfolio
as collateral for the loan.
D) must be repaid within 60 days or is considered to be in default.
62) 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.
63) If the value of the borrower’s collateral drops, a stockbroker can make a ________, requiring
the borrower to provide more collateral for his margin loan.
A) broker’s margin
B) margin call
C) broker’s call
D) None of the above
64) 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
65) A ________ 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
66) Private placements of debt offer all but which of the following advantages?
A) Variable interest rates
B) Longer maturity times than most bank loans
C) More willing to finance deals for fledgling small companies
D) Actually, all of the above are advantages of private placements.
67) Which of the following is a characteristic of a typical private placement of debt?
A) It carries a variable interest rate.
B) Its maturity is shorter than most bank loans.
C) Because of the higher risk, more restrictions are imposed on the borrower than with a
comparable bank loan.
D) It operates much like a bond, but its terms are tailored to the borrower’s individual needs, as a
loan would be.
68) SBICs:
A) were chartered by the SBA to help startup 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.
69) SBICs:
A) tend to prefer later-round financing over funding raw start-ups.
B) can provide both debt and equity capital to small businesses.
C) are prohibited from obtaining a controlling interest in the companies in which they invest.
D) All of the above
70) A(n) ________ 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) SBIC
71) 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) U.S. Department of Agriculture’s Rural Business Co-op Service.
72) 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) U.S. Department of Agriculture’s Rural Business Co-op services.
D) the Economic Development Administration.
73) Malcolm wants to start a business in the prosperous little town of Grove City, a rural town of
10,000 about 65 miles from Pittsburgh, Pennsylvania. His business will create 25 manufacturing
jobs. What federal agency would most likely be interested in guaranteeing a bank loan for
Malcolm?
A) The Department of Housing and Urban Development
B) A local development company
C) U.S. Department of Agriculture’s Rural Business Co-op Service
D) The Economic Development Administration
74) The ________ awards cash grants or long-term contracts to small companies that want to
initiate or to expand their research and development efforts and give the opportunity to attract
early-stage capital investments without having to give up significant equity or take on
burdensome levels of debt.
A) SBIR
B) SBA
C) RBS
D) STTR
75) When a bank makes enough 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
76) 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.
A) preferred
B) qualified
C) certified
D) LDC
77) The majority of loans provided by the SBA are:
A) direct.
B) preferred.
C) guaranteed.
D) asset based.
78) About ________ percent of SBA-backed loans go to start-up companies.
A) 59
B) 49
C) 29
D) 9
79) Under the SBA’s Patriot Express Program, the ceiling is ________ and the SBA guarantees
up to ________ percent of the loan.
A) $250,000: 65
B) $500,000: 85
C) $500,000: 95
D) $6200,000: 100