Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(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.
2) For small businesses, ________ are the heart of the financial market.
A) banks
B) finance companies
C) private placement
D) insurance companies
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.
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.
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
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
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
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
9) Term loans impose restrictions called:
A) loan boundaries.
B) covenants.
C) financial limits.
D) margins.
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
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
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.
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
14) The most common form of secured credit is:
A) accounts receivable financing.
B) inventory financing.
C) floor planning.
D) discounted installment contracts.
15) ________ is (are) an asset-based financing technique.
A) Discounted installment contracts
B) Inventory financing
C) Installment lending
D) Floor planning
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
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.
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
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
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.
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.
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
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.
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.
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
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
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.
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
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
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.
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.
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.
33) SBICs may lend up to ________% of their private capital to a single client.
A) 10
B) 30
C) 20
D) 49
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.
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
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.
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.
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.
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
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
41) When a bank makes enough good 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
42) 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 for the guarantee.
A) preferred
B) qualified
C) certified
D) LDC
43) The SBA’s ________ program offers short-term capital to growing companies seeking to
finance seasonal buildups in inventory or accounts receivable.
A) The Direct Loan
B) CDC
C) Immediate Participation Loan
D) CAPLine
44) The majority of loans provided by the SBA are:
A) direct.
B) preferred.
C) guaranteed.
D) immediate participation.
45) A(n) ________ is a nonprofit organization licensed by the SBA and designed to promote
economic growth in local communities.
A) FDC
B) CDC
C) GDC
D) RDC
46) The average interest rate on SBA-guaranteed loans is:
A) prime minus 2 percent.
B) 2 percent.
C) prime plus 2 percent.
D) 7 percent.
47) ________ is designed to provide working capital to small exporters by providing loan
guarantees of 90 percent of the loan amount up to $1.5 million.
A) A CAPLine program
B) A Section 504 loan
C) An LDC loan
D) An export working capital program
48) The loan ceiling for the International Trade Loan Program is
A) $500,000.
B) $2 million.
C) $1 million.
D) $100,000.
49) ________ were created by the SBA in 1992 to provide loans under $50,000 that are normally
shunned by banks.
A) Microloans
B) Preferred loans
C) Seasonal line of credits
D) 8(a) program loans
50) The maximum amount of a disaster assistance loan is ________ dollars.
A) 100,000
B) 500,000
C) 1 million
D) 2 million
51) The capital access programs (CAPs) were first introduced in:
A) Iowa.
B) Michigan
C) Wisconsin.
D) New York.
52) A small business that uses factoring:
A) pledges its accounts receivable as collateral to obtain a loan from a financial institution.
B) relies on a third-party consultant to apply for SBA-guaranteed loans.
C) sells its accounts receivable to a third party to get the capital it needs.
D) borrows money from lenders by offering them the option to convert the loan into stock in the
company.
53) Factoring:
A) is a more expensive method of financing than borrowing from a bank.
B) places the risk of uncollected accounts receivable on the small business owner.
C) is best used as a long-term source of capital.
D) is a type of trade credit.
54) Some of the reasons which small business owners should consider borrowing money are:
A) gaining market share.
B) refinancing existing debt.
C) taking advantage of cash discounts.
D) All of the above
55) Which of the following factors do banks focus on when lending money to a company?
A) Personal guarantee
B) Positive cash flow
C) Successful track record
D) All of the above
56) Typical short term loans are for:
A) purchase of more inventory.
B) purchase of computers.
C) positive cash to pay other debts.
D) All of the above
57) A line of credit means:
A) the company has access to unlimited funds.
B) a line of credit is the same as long-term loan.
C) a line of credit remains active forever.
D) None of the above
58) Which of the following retailers may use floor planning financing?
A) Car dealer
B) Shoe store
C) Carpet dealer and cleaning service
D) All of the above
59) An amortization schedule is:
A) a breakdown of the loan payment which includes the interest rate and number of years for the
loan to be paid.
B) a breakdown of all fixed assets with their depreciation schedule.
C) a schedule the company has to provide the bank as part of their financial statements.
D) All of the above
60) Installment loans have to be repaid in:
A) 5 to 10 years.
B) 10 to 30 years.
C) 1 to 3 years.
D) None of the above
61) In installment loans, the loan’s ________ schedule typically coincides with the length of the
equipment’s usable life.
A) interest
B) tax
C) evaluation
D) amortization
62) Nonbank sources of debt financing could be based on:
A) asset-based lenders.
B) inventory financing.
C) Both A and B
D) None of the above
63) Jones Manufacturing has been in business for 30 years. About 3 years ago, the company
spent about $2.5 million in upgrading/purchasing new equipment. Currently, due to bad weather,
the company is suffering cash flow problems and is not able to pay its expenses or inventory
purchases. One option for financing would be:
A) inventory financing.
B) asset-based financing.
C) sell the business.
D) All of the above
64) Asset-based lenders require:
A) government approval.
B) state approval.
C) credit.
D) all of the above.