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Exam 13: Sources of Financing: Debt and Equity

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Question 61

Multiple Choice

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________ 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

E) All of the above
F) C) and D)

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Question 62

Multiple Choice

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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.

E) None of the above
F) A) and D)

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Question 63

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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.

About ________ percent of SBA-backed loans go to start-up companies.

Your text describes a variety of common sources of equity capital. Outline and briefly describe five.

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.

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.

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.

In 2007, the SBA launched the Patriot Express loan program, which is designed to assist some of the nation's 25 million ________ who want to become entrepreneurs.

The most common type of commercial bank loan granted to small businesses is:

Venture capital companies invest only in companies in the startup phase.

Angels are an excellent source of ________ money, often willing to wait ________ years or longer to cash out their investment.

A recent survey by the NFIB found that 41 percent of small business owners say that the lack of capital is an impediment to the growth of their companies.

Which of the following represents capital?

Asset-based borrowing enables a small company to borrow money by pledging otherwise idle assets such as accounts receivable and inventory.

In asset-based borrowing, the ________ is the percentage of an asset's value that a lender will lend.

After an entrepreneur invests his own money for startup, he or she will typically seek additional financing from friends and family next.

Unlike venture capital firms and most other institutional investors, angels typically invest in businesses in their earliest phases, providing the seed capital needed to get the business going.

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.

What is asset-based borrowing? Explain the two major types of asset-based borrowing, including the pros and cons of each.