159) Typically, a lender is willing to lend a small business owner 100 percent of the value of
accounts receivable pledged as collateral.
160) Inventory-only deals are the easiest form of asset-based financing to obtain because banks
like to have “tangible” assets backing a loan.
161) If banks refuse to lend money to a startup business, the owner usually cannot convince his
or her vendors and suppliers to extend trade credit either.
162) Vendors and suppliers often are willing to finance a small business owner’s purchase of
goods for 30 to 60 days, interest free, which is usually easier for small businesses than obtaining
a bank loan.
163) Most equipment vendors encourage business owners to purchase their equipment by
offering to finance the purchase and this method of financing is similar to trade credit.
164) Commercial finance companies are willing to take more risk in making loans than
commercial banks, but they also charge a higher interest rate.
165) The majority of the loans a commercial finance company makes are unsecured by
collateral.
166) Savings and loan associations specialize in loans for the purchase of inventory and for
working capital.
167) In a typical commercial or industrial loan, a savings and loan association will lend up to 80
percent of the real property’s value with a repayment schedule of up to 30 years.
168) Loans from stockbrokers carry higher interest rates since the collateral-stocks and bonds in
the borrower’s portfolio-involve a high level of risk.
169) On a margin loan, if the value of the borrower’s investment portfolio drops, the broker can
make a margin call, requiring the borrower to provide more cash or securities as collateral,
within a matter of days or even hours.
170) Lending practices at credit unions are very much like those at banks, but credit unions
usually are willing to make smaller loans and will loan only to their members.
171) Private placement debt is a hybrid between a conventional loan and a bond.
172) SBICs, privately owned financial institutions that are licensed and regulated by the SBA,
provide both debt and equity financing to small businesses.
173) SBICs provide financing to small businesses that are at least 51 percent owned by
minorities, or socially or economically disadvantaged people.
174) SBIC financing would be attractive to an entrepreneur whose primary concern is
maintaining majority ownership in her business, as SBICs are prohibited from obtaining a
controlling interest in the companies in which they invest.
175) Small business lending companies (SBLCs) make only intermediate and long-term SBA-
guaranteed loans that many banks would not consider.
176) The Economic Development Administration offers loan guarantees to create new
businesses in economically depressed areas with below-average incomes and high
unemployment rates.
177) The U.S. Department of Agriculture’s Rural Business Co-op Service provides financial
assistance to businesses that create nonfarm employment opportunities in rural areas.
178) Competing for Small Business Innovation Research Program (SBIR) loans is intense; only
7 percent of the small companies that apply receive funding.
179) When the SBA makes a loan guarantee, banks are willing to consider riskier deals that they
normally would refuse.
180) SBAExpress loans typically are between five and ten years, but loan maturities for fixed
assets can be up to 25 years and an average SBAExpress loan is $50,000.
181) In most SBA loans, the SBA does not actually lend any money; it merely guarantees a bank
repayment of a portion of the loan the bank makes in case the borrower defaults.
182) To reduce the paperwork required and speed up its loan application process, the SBA has
instituted several programs which allow small businesses to benefit due to reduced response
time.
183) The Patriot Express Program is an SBA program that is designed to assist veterans and their
spouses who want to become entrepreneurs.
184) The Community Advantage Loan Program provides loans to communities that have
suffered a natural disaster.
185) The SBA’s Section 504 Certified Development Company Program (CDC), which provides
long-term, fixed-asset financing, is designed to encourage small businesses to expand their
facilities and to create jobs.
186) The average loan in the SBA’s Microloan Program is $100,000.
187) The CAPLine Program makes short-term capital loans to growing companies needed to
finance seasonal buildups in inventory or accounts receivable.
188) Loans made under the SBA’s Disaster Loan Program carry below-market interest rates and
are designed to provide assistance to small businesses that have been the victims of a variety of
disasters, such as hurricanes, floods, earthquakes, and tornadoes, as well as the terrorist attacks
of September 11, 2001.
189) Leasing is not an effective method to reduce the long-term capital requirements.
190) Unable to find financing elsewhere, many entrepreneurs launch their companies using the
fastest and most convenient source of debt capital available: credit cards.
191) One study reports that 7 percent of the capital for start-up companies comes from credit
cards.
192) Explain the difference between equity capital and debt capital. What advantages and
disadvantages characterize each?
193) Your text describes a variety of common sources of equity capital. Outline and briefly
describe five.
194) Sarah’s aunt and cousin have offered to provide some financial assistance for her new
business. Should an entrepreneur turn to friends and family members for money to launch a
company? Why or why not? If so, under what conditions?
195) Angels fill an important role in equity financing of a small business. Discuss their role, their
typical profile, and how to find an angel.
196) Venture capital companies are an important source of equity funding for small businesses.
Discuss their policies, ownership control, and investment preferences regarding funding small
businesses.
197) What is an IPO? What type of companies should go public? Outline the advantages and
disadvantages of an IPO. Also, outline the steps a company should follow in taking a company
public.
198) Explain the role that commercial banks play in financing small businesses. What kinds of
loans do banks offer small companies?
199) What is asset-based borrowing? Explain the two major types of asset-based borrowing,
including the pros and cons of each.
200) Explain the differences in the lending practices of commercial banks, commercial finance
companies, and savings and loans associations.
201) What is involved with vendor financing in the form of trade credit? How important is it as a
source of debt financing to small firms? What role does it play in “bootstrapping”? What are
some other bootstrapping techniques?
202) Explain how a typical SBA loan guarantee works. What interest rates do these loans
normally carry?
Mini-Case 13-1: “Where do I go now …?
Christine Hernandez is in the process of launching a restaurant. Christine has never owned her
own restaurant before, but she has worked for two of the best restaurants in town. Starting out as
a hostess, Christine developed a special knack for the business and quickly worked her way up to
the job of manager. Her 18 years of experience have given her a solid foundation for running her
own restaurant.
Christine has worked with a counselor at a nearby Small Business Development Center and a
counselor from the Service Corps of Retired Executives to prepare a business plan. She asked
two other consultants and an accountant to review the plan and incorporated their suggestions
into the finished product. When Christine took her plan to her bank, however, the bank turned
down her loan request of $165,000, citing the venture as “too risky, given the failure rate of
restaurants.” The bank acknowledged her experience as “a major asset,” but said that it “could
not expose itself to such risks in its portfolio.” Christine heard the same story from three other
banks.
Christine is confident in her ability to manage her own restaurant successfully, and she is
determined to get the financing she needs to launch it.
203) What might Christine do to convince a bank to lend her the money she needs to launch her
company?
204) Review the various loan programs under the Small Business Administration designed to
help finance businesses like Christine’s. Which of these programs would most likely help
Christine get the capital she needs?
205) What other sources of capital would you suggest that Christine explore?
Mini-Case 13-2: Bowden Brake Service
Jim Bowden has been operating his business for some time now and thinks it is time to grow and
expand. To compute the cost of expanding his existing business, Jim Bowden makes the
following estimates:
Adjacent lot $40,000
Metal prefab building 25,000
Hydraulic lifts 15,000
Tools and equipment 9,000
Parts and inventory 5,000
Additional operating expenses 55,000
TOTAL $149,000
206) Explain to Jim the possible (and realistic) sources of capital for expansion. Where would
you recommend that he go for the funds he needs? Why?