65) Convertible bonds:
A) can’t be converted to equity.
B) typically pay a lower interest rate.
C) typically pay a higher interest rate.
D) None of the above
66) Generally speaking, all growing companies need to borrow money at some point.
67) A small business owner should avoid borrowing money when he/she sees a downturn in
business or to refinance existing debt.
68) 47% of small business owners rely on banks as their source of start-up capital.
69) Commercial banks are lenders of last resort for small businesses.
70) Banks focus on a small business’s ability to generate a positive cash flow when lending
money.
71) Commercial banks are primarily lenders of short-term capital to small businesses.
72) The common short-term loan is for one year, often repaid sooner, and repaid in one lump
sum.
73) A line of credit is usually secured by collateral.
74) A recent survey of small companies with lines of credit found that only 25% actually use
them.
75) A boat retailer would most likely use a line of credit to finance the purchase of his inventory.
76) A business owner does not pay interest on a floor-planned item in inventory until it is sold.
77) Unsecured term loans typically involve very specific terms which may limit the owner’s
freedom to make financial decisions.
78) In an installment loan for equipment, the loan’s amortization schedule would coincide with
the equipment’s useful life.
79) Installment loans are made to big firms for purchasing other businesses.
80) Term loans impose restrictions called covenants.
81) Even companies whose financial statements are too weak to produce other types of loans can
get asset-based loans.
82) Typically, a commercial bank will lend a small business owner 100% of the value of
accounts receivable pledged as collateral.
83) Inventory-only deals are the easiest form of asset-based financing to obtain because banks
like to have “tangible” assets backing a loan.
84) Asset-based financing is an efficient means of borrowing because the business only pays for
the capital it actually needs and uses.
85) Trade credit, while more difficult to obtain than bank financing, is a somewhat important
source of financing to most established companies.
86) Start-up companies often use trade credit from suppliers to buy equipment and fixtures for
their business.
87) Commercial finance companies are willing to take more risks in making loans, but they also
charge a higher interest rate.
88) The majority of the loans a commercial finance company makes are unsecured by collateral.
89) Commercial finance companies offer many of the same types of loans as commercial banks,
but they are willing to tolerate more risk in their loan portfolios.
90) When denied bank loans, small business owners often look to commercial finance companies
for the same types of loan.
91) Loans from stockbrokers carry higher interest rates since the collateral—stocks and bonds in
the borrower’s portfolio—involve a high level of risk.
92) Loans from a stockbrokerage on the small business owner’s portfolio can be “called” to be
paid within a matter of days or even hours.
93) Insurance companies specialize in long-term loans.
94) Some credit unions are now extending personal loans to members, often without personal
collateral, in order to start a business.
95) Credit unions are best known for making consumer and car loans.
96) Bonds are corporate “IOUs.”
97) Industrial revenue bonds are a relatively inexpensive source of funds for small
manufacturers.
98) Private placement debt is a hybrid between a conventional loan and a bond.
99) Because private investors are willing to take greater risks than banks, they are more willing
to finance deals through private placements than are banks.
100) SBICs act as government-backed venture capitalists.
101) SBICs are an example of a public-private partnership.
102) An SBIC can lend up to 40% of its private capital to a single client.
103) SBICs provide only debt financing to small businesses.
104) Small Business Investment Companies (SBICs) provide both debt and equity financing to
small businesses.
105) The EDA makes low-interest loans to create new businesses in economically depressed
areas with below-average incomes and high unemployment rates.
106) Urban Development Grants are used to construct buildings and plants for small businesses
and have no ceilings or geographic limitations.
107) The Farmers Home Administration only makes loans to small farms.
108) The Farmers Home Administration makes direct loans to small businesses meeting the rural
area criteria in order to create nonfarm employment.
109) The Small Business Innovation Research Program was started by the National Science
Foundation and spread to 10 other federal agencies with an annual budget in excess of $100
million.
110) The Small Business Technology Transfer Act of 1992 supports the SBIR program by
exploiting promising technological developments that come out of small businesses and funds
and guides their practical application to the commercial world.
111) An entrepreneur seeking an SBA loan guarantee can cut out a tremendous amount of time
and paperwork by working with a bank that is either a certified or a preferred lender.
112) The majority of loans provided by the SBA are direct.
113) The SBA’s immediate participation loans are a mix of private and public funds, and the
SBA is prohibited from financing more than 75% of the loan.
114) The average SBA loan guarantee is $150,000 and has an average duration of seven years.
115) Approximately 75% of SBA-guaranteed loans go to small businesses start-ups.
116) SBA loans do not carry special deals or interest rates and typically are set at prime plus
2.25% for loans under seven years in length.
117) Three lenders play a role in every 504 loan: a bank, the SBA, and a certified development
company (CDC).
118) The SBA’s Section 504 program is designed to encourage small businesses to expand their
facilities and to create jobs.
119) The CDC is the for-profit arm of the SBA.
120) In a factoring arrangement, the risk of uncollected accounts receivable falls on the small
business owner.
121) Leasing is an effective way to reduce long-term capital requirements for a small business.
122) Jerry Turner and Michael Clarke needed money to buy equipment and weren’t able to get
either trade credit or a bank loan because they had no assets and didn’t have the cash for a down
payment.
123) Credit cards are a ready source of temporary financing that can carry a company through
the start-up phase until it begins generating positive cash flow.
124) New online funding options are emerging to help small businesses with credit.
125) Revolving loan funds (RLFs) combine private and public funds to make loans to small
businesses, often at below-market interest rates.
126) Capital Access Programs (CAPs) that are designed to encourage lending institutions to
make loans to businesses that do not qualify for traditional financing.
127) Disaster loans are made to small businesses devastated by some kind of financial or
physical losses.
128) When a lender becomes a certified lender, it makes the final lending decision itself, subject
to SBA review.
129) The International Trade Program is for small businesses that are engaging in international
trade or are adversely affected by competition from imports.
130) The CAPLine Program offers short-term capital to growing companies needing to finance
seasonal buildups in inventory or accounts receivable.
131) The Community Development Block Grants (CDBGs) are extended to cities and towns that,
in turn, lend or grant money to entrepreneurs to start small businesses that will strengthen the
local economy.
132) The maximum disaster loan usually is $2 million.
133) CAPs are designed to encourage lending institutions to make loans to businesses that do not
qualify for traditional financing.
134) Typically, factoring is less expensive than bank and commercial finance company loans.
135) One advantage of leasing is that in most cases, it does not require any down payment.
136) Under a CAP, the bank and the borrower each pay an upfront fee (a portion of the loan
amount) into a loan-loss reserve fund at the participating bank, and the state matches this
amount.
137) The average microloan is for $25,500 with a maturity of 37 months (the maximum term is
six years).
138) Approximately one-half of all SBA loan guarantees are for machinery and equipment or
working capital.
139) Most SBIC loans are between $10,000 and $50,000 and the loan term is longer than most
banks allow.
140) Under what circumstances should the small business owner consider borrowing money?
141) Explain the role of commercial banks as source of debt capital for small businesses. What
types of financing are available from commercial banks?
142) What is an asset-based lender? What are the most common types of asset-based financing?
143) What is trade credit? How is it different from or the same as loans from equipment
suppliers?
144) What role do commercial finance companies, stockbrokerages, and insurance companies
play in providing debt-based loans to small businesses?
145) What is an SBIC? How important is it as a source of small business capital? How does it
operate?
146) How do the EDA and HUD lend money to small businesses?
147) What are local development companies and the small business innovation research
programs? How do they help small businesses?
148) Explain the different SBA loan programs. Explain how a typical SBA loan guarantee
works. What interest rates do such loans normally carry?
149) Explain how a small business can use factoring to raise funds. What are the advantages and
dangers of this type of financing?