Ch9 Verified Test Bank Small Business Finance

Test Bank

Chapter 9: Small Business Finance

Multiple Choice

1. Those who rarely invest in retail operations but instead focus on high technology and growth industries (also essential services) are ______.

a. banks

b. the Small Business Administration

c. angels

d. venture capitalists

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

2. The process of determining initial capital requirements for a business begins with identifying ______.

a. long-term liabilities

b. short-term and long-term equity

c. short-term and long-term assets as well as expenses

d. financing requirements

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

3. The fundamental financial building blocks for a small business owner are knowing what assets are required to open the business and how those assets will be financed. This is known as ______.

a. financial management

b. initial capital requirements

c. managerial accounting

d. open-book management

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

4. Assets that will be converted into cash within one year are called ______.

a. short-term assets

b. long-term assets

c. capital assets

d. financial assets

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

5. Assets that will not be converted into cash within one year are called ______.

a. short-term assets

b. long-term assets

c. capital assets

d. financial assets

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

6. Cash, inventory, and prepaid expenses are which of the following?

a. short-term assets

b. long-term assets

c. capital assets

d. financial assets

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

7. Building, equipment, land, and patents are which of the following?

a. short-term assets

b. long-term assets

c. capital assets

d. financial assets

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

8. If a small business owner needs to obtain a loan for purchasing inventory that is expected to sell within one year, the maturity of the loan should be ______.

a. short-term

b. intermediate-term

c. long-term

d. perpetuity

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

9. The final step in defining required assets before opening a business involves ______.

a. evaluating fixed costs and other expenses

b. subtracting the dollar value of the owner’s equity from the total dollar value of the required assets

c. evaluating the situation to determine exactly what has to be in place for the business to operate effectively

d. determine financing requirements

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

10. When reviewing loan applications, Jessica, a loan officer at A+ credit union, always examines the amount of cash and marketable securities that applicants have on hand. She reviews historical, current, and projected cash flows of a business to gauge whether applicants are able to repay the loan. These activities best describe which of the five “C’s” of credit?

a. Capacity

b. Capital

c. Collateral

d. Character

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

11. Determining the applicant’s ability to repay a loan by examining the amount of cash and marketable securities and the projected cash flows is which of following five C’s?

a. Capacity

b. Capital

c. Competency

d. Character

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

12. The general economic climate at the time of the loan application is which of the following five C’s of credit?

a. Capacity

b. Capital

c. Conditions

d. Character

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

13. The ability to finance an investment through borrowed funds is known as ______.

a. equity

b. leverage

c. capital

d. liabilities

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

14. Debt creates the risk of becoming ______ if the entrepreneur is unable to make each debt payment on time.

a. profitable

b. insolvent

c. overextended

d. successful

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

15. Providers of equity funds forego the opportunity to receive periodic repayments in order to share in ______.

a. sales

b. profits

c. revenues

d. expenses

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

16. Equity funds never need to ______.

a. be repaid

b. be accounted for

c. be stated on the income statement

d. be stated on the balance sheet

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

17. Two kinds of funds are potentially available to the entrepreneur ______.

a. debit and credit

b. financing and borrowing

c. debt and equity

d. liability and asset

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

18. An amount of money borrowed from a lender is known as the ______.

a. interest rate

b. principal

c. maturity length

d. prime interest rate

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

19. The amount of money that a small business owner needs to borrow is the difference between the pro forma assets and ______.

a. projected sales

b. projected expenses

c. owner’s equity

d. project liabilities

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

20. The amount of money paid for the use of borrowed funds is known as ______.

a. interest

b. principal

c. maturity length

d. debt

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

21. Interest rates for small business owners are normally made up of the ______ plus an additional percentage.

a. discount rate

b. federal funds rate

c. prime interest rate

d. annual percentage rates

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

22. The more compounding periods, the ______ the effective rate of interest.

a. lower

b. no effect on

c. higher

d. better

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

23. A loan with an interest rate that changes over the life of the loan is known as a ______.

a. fixed-rate loan

b. variable-rate loan

c. balloon payment loan

d. revolving loan

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

24. The rate of interest charged to a bank’s “best” customers is referred to as ______.

a. fixed rate

b. dividend rate

c. grade A rate

d. prime rate

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

25. Upon obtaining a $100,000 business loan from his local bank, Arthur was informed that he must keep at least $10,000 on deposit with the bank. This is referred to as a/an ______.

a. effective rate of interest

b. compensating balance

c. required dividend

d. maturity requirement

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

26. ______ refers to the intervals at which interest is paid.

a. Collateral

b. Liquidity

c. Compounding

d. Securing

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

27. Wilma is ecstatic about the purchase of her first house. She has taken out a 30-year mortgage at a 5.25 percent interest rate, and her mortgage broker has informed her that the interest rate will not change for the life of the loan. What type of loan did Wilma take out?

a. fixed-rate loan

b. variable-rate loan

c. equity loan

d. long loan

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

28. Each year, Alexandra receives a payment for the stock she owns within the company where she is employed. The amount of the annual payment fluctuates based on the company’s net profits. This is referred to as ______.

a. an asset

b. a liability

c. a dividend

d. equity

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

29. The length of time in which a loan must be repaid is called the ______.

a. principal

b. interest rates

c. maturity

d. collateral

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

30. The sale of common stock or the use of retained earnings to provide long-term financing is known as ______.

a. debt financing

b. creative financing

c. equity financing

d. long-term financing

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

31. A clause that requires the borrower to maintain a minimum level of working capital until the loan is repaid is known as ______.

a. covenants

b. assurances

c. endorsements

d. guarantors

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

32. ______ security refers to the borrower’s assurance to lenders that loans will be repaid.

a. Loan

b. Note

c. Debt

d. Equity

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

33. The two types of loan endorsers are ______.

a. borrowers and guarantors

b. guarantors and comakers

c. borrowers and lenders

d. comakers and borrowers

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

34. Ralph just received a loan from his local bank, where he must make periodic payments that include accrued interest and part of the outstanding principal balance. Ralph’s loan is known as a/an ______.

a. lateral loan

b. unsecured loan

c. secured loan

d. installment loan

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

35. ______ are the backbone of the credit market, offering the widest assortment of loans to creditworthy small businesses.

a. Credit unions

b. Savings and loans

c. Commercial banks

d. Venture capitalists

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

36. A short-term loan where collateral is not required is called a/an ______.

a. unsecured loan

b. secured loan

c. line of credit

d. demand note

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

37. An agreement that makes a specific amount of short-term funding available to a business as it is needed is called a/an ______.

a. unsecured loan

b. secured loan

c. line of credit

d. demand note

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

38. A short-term loan where both principal and interest must be repaid in a lump sum at maturity is known as a/an ______.

a. unsecured loan

b. secured loan

c. line of credit

d. demand note

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

39. A loan that requires the borrower to make small monthly payments that are usually enough to cover the interest, with the balance due at maturity is called a ______.

a. balloon note

b. floor planning

c. line of credit

d. demand note

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

40. A type of business loan that is generally made for high-priced items like new automobiles or trucks, where the business holds the item in inventory and pays interest, and where the asset is still owned by the lender until it is sold, is known as which of the following?

a. an unsecured loan

b. floor planning

c. a line of credit

d. a demand note

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

41. Which type of loans are made to established businesses that have demonstrated a strong overall credit profile and have shown excellent creditworthiness and an extreme probability of repayment?

a. balloon note

b. floor planning

c. installment loans

d. unsecured term loans

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

42. Commercial finance companies extend short- and intermediate-term credit to small businesses at an interest rate that is ______ commercial banks.

a. lower than

b. the same as

c. higher than

d. the prime interest given by

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

43. Self-liquidating loans are often ______.

a. unavailable

b. tied to life insurance

c. provided by family members

d. unsecured

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

44. What type of loan requires collateral as security for the lender?

a. lateral loan

b. unsecured loan

c. secured loan

d. installment loan

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

45. At Lou’s Landscaping Services, a number of customers were not paying up on time, and Lou needed cash for a large purchase. As a result, Lou sold the company’s accounts receivable to a finance company for 70 percent of the total collection amount. This method of raising funds is referred to as ______.

a. floor planning

b. bartering

c. crediting

d. factoring

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

46. Which type of loans are provided by commercial finance companies and allow small businesses to have use of state-of-the-art equipment at a fraction of the cost?

a. leasing

b. floor planning

c. balloon notes

d. factoring accounts receivable

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

47. The practice of raising funds for a business through the sale of accounts receivable is known as which of the following?

a. leasing

b. floor planning

c. balloon notes

d. factoring accounts receivable

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

48. A finance company will generally purchase the accounts receivable or lend small businesses somewhere between ______ percent of the face value of the accounts receivable being factored.

a. 40 and 60

b. 45 and 70

c. 55 and 80

d. 70 and 90

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

49. ______ are made to small business owners based on the amount of money paid in premiums on an insurance policy that has a cash surrender value.

a. Floor planning loans

b. Leases

c. Installment loans

d. Policy loans

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

50. An insurance company will frequently lend up to ______ of a policy’s cash surrender value.

a. 10 percent

b. 30 percent

c. 59 percent

d. 95 percent

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

51. A small business may qualify for loans through a commercial bank where a portion of the loan is guaranteed by the Small Business Administration. This loan is known as ______.

a. an SBA loan

b. a government loan

c. a direct loan

d. a 504 loan

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

52. Loans that are granted by commercial banks to entrepreneurs that are then guaranteed at up to 90 percent of the loan value by the SBA as part of the 7(a) program are called which of the following?

a. SBA loans

b. guaranteed loans

c. direct loans

d. 504 loans

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

53. A relatively new loan program available through the SBA that simplifies the paperwork and reduces the time required for a loan answer that has historically been required is the ______.

a. SBA loan

b. guaranteed loan

c. direct loan

d. SBA express program

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

54. Under the SBA express program, up to ______ can be borrowed by a small business with a one-page application.

a. $10,000

b. $150,000

c. $75,000

d. $350,000

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

55. Which of the following is an appropriate follow-up action if a potential lender initially says “no”?

a. ask for advice

b. avoid further communication

c. submit the same application again

d. show resentment

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

56. The first place most entrepreneurs find equity capital is ______.

a. partners

b. community investors

c. venture capital firms

d. in their personal assets

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

57. Most state and local government programs usually have ______ interest rates than conventional loans, often with ______ maturities.

a. higher; longer

b. higher; shorter

c. lower; longer

d. lower; shorter

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

58. The purchase of goods from suppliers who do not demand payment immediately is called which of the following?

a. trade credit

b. guaranteed loans

c. direct loans

d. LowDoc program

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

59. Most lenders will expect entrepreneurs to provide equity funds in an amount of at least ______ percent of the business before approving a loan.

a. 10

b. 20

c. 35

d. 50

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

60. The Department of Commerce estimates that nearly ______ of all startups begin without borrowed funds.

a. 10 percent

b. 30 percent

c. 66 percent

d. 75 percent

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

61. Groups or individuals who invest in specific high-potential new or expanding firms are called which of the following?

a. venture capitalists

b. small business investment companies

c. angels

d. private placements

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

62. Approximately what percentage of U.S. businesses are partnerships?

a. 2

b. 10

c. 20

d. 30

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

63. Walter is a retired CEO of a Fortune 500 company. He now focuses much of his energy on loaning money to new business owners who have innovative ideas but limited funds. Walter can best be described as what type of angel?

a. professional angel

b. micromanagement angel

c. corporate angel

d. white angel

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

64. Doctors, lawyers, and accountants make up what category of angels?

a. professional angels

b. micromanagement angels

c. entrepreneurial angels

d. enthusiast angels

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

65. An investor who is typically a successful entrepreneur who has a desire to assist startups or emerging businesses by investing $20,000 to $50,000 is known as a/an ______.

a. venture capitalist

b. small business investment company

c. angel

d. private placement

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

66. Which of the following involves the sale of stock to a selected group of individuals where the stock cannot be purchased by the general public?

a. venture capitalists

b. small business investment companies

c. angels

d. private placement

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

67. The first sale of the stock of a business that is made available to public investors is known as which of the following?

a. an IPO

b. a small business investment company

c. an angel

d. a private placement

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

NARRBEGIN: 9-1

Scenario 9-1. Jim is interested in beginning his own small business dealing with the repair and maintenance of household appliances. He has a talent for fixing these types of appliances and has been doing so as a sideline business for several years. He has acquired some of the needed tools; however, a sizeable investment will need to be made in tools and equipment in order for him to repair the appliances that will be brought to his shop for service. He would like part of his competitive advantage to be the capability to fix all appliances, not just one type. Jim has just one small problem--a lack of funds. He comes to you for advice.

NARREND

68. In Scenario 9-1, Jim has two basic choices when looking for funds. They are which of the following?

a. assets and liabilities

b. debt and assets

c. debt and equity

d. equity and assets

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-1

69. In Scenario 9-1, the primary disadvantages of using debt financing are all but which of the following?

a. it increases risk due to the possibility of insolvency

b. it allows a voice in management of the business

c. it has to be repaid

d. leverage can enable returns to be lessened

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-1

70. In Scenario 9-1, the primary disadvantages of using equity financing are all but which of the following?

a. it allows a voice in the management of the business

b. it provides for a sharing of the profits

c. it does not constrain cash flow

d. it shares ownership in the business

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-1

NARRBEGIN: 9-2

Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan’s Road Machines. He would like to sell a variety of all-terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five C’s of credit when looking at external funding in order to prove his creditworthiness.

NARREND

71. In Scenario 9-2, a major concern of any provider of funding will be Ryan’s ability to repay his loan. This refers to which of the five C’s?

a. Capacity

b. Capital

c. Collateral

d. Conditions

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-2

72. In Scenario 9-2, in judging this C, the net worth of the business will be determined. The value of the assets minus the value of the liabilities will provide the determination for ______.

a. Capacity

b. Capital

c. Collateral

d. Conditions

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-2

73. In Scenario 9-2, Ryan has never borrowed money before; however, he currently has a loan outstanding for his school expenses. Which of the five C’s is judged primarily on the applicant’s past repayment patterns?

a. Character

b. Capital

c. Collateral

d. Conditions

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-2

74. In Scenario 9-2, Ryan’s inventory will provide a large part of this C. The machines themselves can be pledged as security in order to meet the C of ______.

a. Capacity

b. Capital

c. Collateral

d. Conditions

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-2

75. In Scenario 9-2, at the present, the economy is growing rapidly. In fact, it is growing so rapidly, there is a continuing discussion that interest rates may need to be raised in order to slow economic growth. These factors refer to which of the five C’s?

a. Capacity

b. Capital

c. Collateral

d. Conditions

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

NAR: 9-2

True/False

1. Each business must have its assets in place, which are all those things it needs to operate, before it ever opens its doors.

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

2. Capital is a function of the applicant’s personal financial strength.

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

3. Assets owned by a loan applicant that can be pledged as security for the repayment of the loan constitute collateral.

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

4. The applicant’s character is not a consideration when being evaluated by a lender.

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

5. Simply having a good idea will not be enough to convince investors to risk their capital. A small business owner must also be able to show that he/she is a competent manager with previous business success.

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

6. Two types of funds are available to the small business owner: debt and equity.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

7. Leverage can enable a small business owner to magnify the potential returns expected.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

8. In most cases, the sheer strength of a business idea can win full funding for a venture.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

9. The decision to seek outside funds, either through debt or equity, is relatively unimportant and simple.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

10. Until the debt is repaid, the creditor has a legal claim on a portion of the cash flows of the business.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

11. A lender may require a compensating balance, which means that the amount of funds is reduced, causing the rate of interest to increase, since the same amount of interest is paid and fewer funds are available.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

12. The prime rate is defined as the rate of interest banks charge their “best” customers.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

13. A fixed-rate loan typically has a higher interest rate than the initial rate on a variable-rate loan.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

14. Ordinarily, the longer the maturity of the loan, the higher the rate of interest.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

15. Most lenders are hesitant to make loans to startup businesses unless a wealthy friend or relative will cosign the loan.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

16. Today, a credit score of 580–690 is necessary for an individual to obtain a business loan.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

17. A positive covenant spells out what a borrower cannot do when signing a loan agreement.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

18. Commercial banks are the backbone of the credit market.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

19. A demand note allows the business to borrow and repay funds up to the maximum amount specified in the agreement throughout the year.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

20. Floor planning is a special type of a loan used for financing high-priced inventory like new cars and trucks.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

21. If a small business uses its receivables as collateral for a loan in the process known as pledging, the finance company will collect the accounts receivable.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

22. Factoring has historically been viewed as one of the most desirable approaches to financing.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

23. Term insurance policies have no borrowing capacity.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

24. The most active government lender is the Small Business Administration.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

25. Government lending programs exist to stimulate small businesses.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

26. The 504 loan program provides small businesses with funding for fixed assets through a certified development company when conventional loans are not possible.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

27. There is no such thing as a guaranteed loan--especially with the SBA.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

28. Most lenders will expect entrepreneurs to provide equity funds in an amount of at least 35 percent of the business before approving the loan.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

29. Most new businesses are originally financed with the personal funds of the small business owner.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

30. If a lender says no to a small business loan application, it is acceptable to ask whether the bank can rework the application so that it meets the lending criteria.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

31. About 40 percent of the plans submitted to venture capital firms are ultimately funded.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

32. Venture capital firms rarely invest in high-tech industries.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

33. Micromanagement angels own and operate their own business and are looking for ways to diversify their portfolios.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

Short Answer

1. List and explain the five C’s of credit.

KEY: Learning Objective: 9.1: Determine the financing needs of your business.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.1: Funding For Small Business

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

2. Compare and contrast debt and equity financing.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

3. Describe three sources of debt financing for a small business owner.

KEY: Learning Objective: 9.2: Define basic financing terminology.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.2: Basic Financial Vocabulary

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

4. If a potential lender says “no,” what are some actions that a small business manager should take?

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

5. Describe three sources of equity financing.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

6. Explain why companies choose public offerings.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

7. Explain three considerations a small business owner should keep in mind when choosing a lender or investor.

KEY: Learning Objective: 9.3: Explain where to look for sources of funding.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 9.3: How Can You Find Capital?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking