Chapter 7 BUS-125

According to the National Business Incubation Associate (NBIA), business incubation is...

"a dynamic process of business enterprise development."

Incubators help clients to secure necessary capital in several ways:

- Managing in-house and revolving loan funds - Networking it to locate and connect venture capitalists - Connections with angel investors - Assisting with loan applications

The procedure to be followed is for the business owner to contact a bank to request an SBA loan. The following documents should already be prepared to expedite the process:

- a narrative business plan with profit/loss projections for 3 years. - resumes for key managers and owners. - an outline showing how the loan will be used, including an itemized list of assets to be purchased. - at least 3 years of historical financial statements on the company and personal financial statements for all owners. - a proposed collateral structure.

Identify the financial requirements a small business should meet to receive a loan guaranteed by the Small Business Administration (SBA).

-A simple, but feasible business plan -A personal guarantee of the loan by owners who own 20 percent or more of the business

Identify the services provided by business incubators.

-They provide small businesses connections with angel investors. -They help small businesses with their loan applications.

Agriculture

Annual receipts not exceeding $0.5 million to $3.5 million, depending on the industry.

Services

Annual receipts not exceeding $3.5 million to $13.5 million, depending on the industry in which the applicant is primarily engaged.

Retailing

Annual sales or receipts not exceeding $3.5 million to $13.5 million, depending on the industry.

_____ are the leading providers of external financing to small businesses.

Commercial banks

True or false: In comparison to owners of large firms, owners of smaller firms rely more on external debt capital than on their own capital.

False

Which of the following is true of small company offering registration (SCOR)?

It allows a company to raise up to $1 million by selling common stock directly to the public.

Which of the following is true of the loan guarantee program of the Small Business Administration (SBA)?

It guarantees the repayment of a certain percentage of the loan borrowed by a small business.

Which of the following is true of the process of seller financing?

It includes a promissory note with interest rate, a repayment schedule, and default consequences.

Identify a true statement about dividends of preferred stock of a corporation.

It must be declared by the corporation's board of directors before it is paid.

In the context of debt financing, which of the following is true of trade credit?

It occurs spontaneously in the normal course of managing a business.

Which of the following is true of the Small Business Administration (SBA)?

It offers direct specialized financing to small businesses and offers guarantees on loans made by private lenders.

Manufacturing

Maximum number of employees may range from 500 to 1,500, depending on the industry in which the applicant is primarily engaged.

Wholesaling

Maximum number of employees not to exceed 100.

_____ are private firms licensed and regulated by the Small Business Administration (SBA) to make venture investments in small firms.

Small business investment companies (SBICs)

_____ allows the sale of a company's common stock to the public through a regulated board such as Nasdaq or AMEX without the hassle of an initial public offering.

Small company offering registration (SCOR)

Which of the following is a unit licensed by the Small Business Administration (SBA) that assists socially and economically disadvantaged businesses with venture capital?

Specialized small business investment companies (SSBICs)

In the context of debt financing, which of the following is true?

The lenders' income does not change with the success of the business.

Which of the following is true of angel capitalists?

They are wealthy local businesspeople and other investors who may be external sources of equity funding.

Which of the following is true of business incubators?

They assist young firms in survival and growth during the startup period

Identify a characteristic of common stockholders of a firm.

They have good control over the management of the firm.

Which of the following is true of small business investment companies (SBICs)?

They offer assistance in management to the businesses they help finance.

Identify the role of commercial banks in financing small businesses.

They offer loans, online banking, insurance, international services, wealth management, and corporate cash management.

In the context of funding, which of the following is true of owners of small firms?

They prefer using their own funds as they are unwilling to share control of their firms.

True or false: A loan that is guaranteed by the Small Business Administration (SBA) can be used by a small business to purchase land, buildings, or any equipment that it requires.

True

True or false: Preferred stock dividends have to be paid to its holders before dividends can be paid to the common stockholders.

True

True or false: To prove its creditworthiness to a bank, a business that opens a line of credit with it is required to pay off all its unsecured debt for a short, specified time period every year.

True

An arrangement that a small business can have with commercial banks that permits the business to borrow up to a set amount without red tape is known as _____.

a line of credit

asset-based financing

accepts as collateral the assets of a firm in exchange for the loan.

employee stock ownership plans (ESOPs)

allow small businesses to reap tax advantages and cash flow advantages by selling stock shares to workers.

a diverse group of high-net-worth individuals who will invest part of their assets in high-risk, high-return entrepreneurial ventures.

angel capitalists

bonds

are a form of debt security with a standard denomination, method of interest payment, and method of principal repayment.

preferred stockholders

are owners with a superior claim to a share of the firm's profits, but they often have no voting rights.

Small business investment companies (SBICs)

are private firms licensed and regulated by the SBA to make "venture" investments in small firms. SBICs supply equity capital and extend unsecured loans to small enterprises unsecured loans to smell enterprises that meet their investment criteria. Intended to be profit-making institutions, so they tend not to make very small investments.

common stockholders

are the owners of a corporation with claim to a share of the profits and the right to vote on certain corporate decisions.

fixed assets

are those that are of a relatively permanent nature and are necessary for the functioning of the business.

Many entrepreneurs find that SBA loans...

are very hard- if not impossible - to obtain.

Angel capitalists or business angels

are wealthy local business-people and other investors who may be external sources of equity funding.

Specialized small business investment companies (SSBICs)

assist socially and economically disadvantaged businesses with venture capital.

In the context of equity financing for small businesses, _____ consists of two or more companies exchanging items of roughly equal value.

bartering

debt financing

comes from lenders who will be repaid at a specified interest rate within a specified time span.

Jack wants to sell his antique motorbike. He gives it to John, who offers to sell it for him at his motorbike shop. He agrees to receive the payment for the bike only after it is sold. This is an example of _____.

consignment selling

_____ allows owners of small businesses to make payments to suppliers only when their products are sold rather than when they are received in stock.

consignment selling

barter

consists of two or more companies exchanging items of roughly equal value.

In the context of funds that a company uses, _____ comes from lenders who will be repaid at a specified interest rate within a specified time span.

debt financing

Seller financing refers to the _____.

elimination of a third party when initiating a major purchase

In the context of equity financing for small businesses, _____ allow small businesses to reap tax advantages and cash flow advantages by selling stock shares to workers.

employee stock ownership plans (ESOPs)

Incubators offer...

entrepreneurial firms shared office services, access to equipment, flexible leases, and expandable space- all under one roof.

Fixed assets should be financed with...

equity funds, or with debt funds having a maturity approximately equal to the productive life of the asset.

Angel capitalists provide up to...

four times as much total investment capital for small businesses as the professional venue capital firms. While angels have always been around, fortunes made in the high-tech industries have spawned more angels that ever before.

preferred stock

has a fixed par value and a fixed dividend payment, expressed as a percentage of par value.

One primary purpose of the SBA is to...

help small firms find financing, including those having trouble securing conventional financing, especially at reasonable rates. Many small firms need term loans of up to 25 years, but most lenders limit their lending to short-term loans.

lease

is a contract that permits use of someone else's property for a specified time period.

equity

is an owner's share of the assets of a company. In a corporation, it is represented by shares of common or preferred stock.

working capital

is current assets, less current liabilities, that a firm uses to produce goods and services, and to finance the extension of credit to customers.

chattel mortgage loan

is debt backed by some physical asset other than land, such as machinery, equipment, or inventory.

trade credit

is extended by vendors on purchases of inventory, equipment, and/or supplies. - in general, trade credit is one of the most important sources of debt financing for small business because it arises spontaneously in the normal course of operating the business.

mortgage loan

is long-term debt that is secured by real property.

small company offering registration (SCOR

is the sale of common stock to the public through a regulated board such as Nasdaq or AMEX without the hassle of an initial public offering.

financial leverage

is using fixed-charge financing, usually debt, to fund a business's operations.

A small business owner's ability to attract money depends on the perception of the _____.

lender concerning the owner's character

If a lender is providing a loan for a new business venture, he or she will primarily want to see if the owner can _____.

live within the income generated by the business

Debt securities are generally in the form of...

loans.

Small businesses' long-term assets, such as buildings and other facilities, should be financed with...

long-term loans

Venture capital (VC) firms

make investments based on projected future income and generally require a substantial return as either equity or profit.

long-term securities

mature after five years or longer.

intermediate-term securities

mature in one to five years

short-term securities

mature in one year or less

Business incubators...

nurture young firms and help them survive and grow during the startup period when they are most vulnerable. Hands-on management assistance, access to financing, and orchestrated exposure to critical business or technical support services are provided.

A firm's preferred stockholders have a financial claim to its profits that are...

paid to them before the profits are distributed to the common stockholders.

consignment selling

payments to suppliers are made only when the products are sold, rather than when they are received in stock.

line of credit

permits a business to borrow up to a set amount without red tape.

cash budget

project working capital needs by estimating what out-of-pocket expenses will be incurred and when revenues from these sales are to be collected.

While commercial banks are still a good source for small borrowers who have funds of their own and proven financial experience,

rarely they will make conventional loans to a startup business.

seller financing

refers to the elimination of a third party when financing a major purchase.

Overall, owners of small firms...

rely more on their own capital and less on external debt capital than owners of larger firms.

common stock

representing the owners' interest, usually consists of many identical shares, each of which gives the holder one vote in all corporate elections.

stock

represents ownership in a corporation.

Small firms are more dependent on...

short-term debt than long-term debt.

Short-lived assets, such as inventory or accounts receivable, should be financed with...

short-term loans

SBICs finance small firms by making...

straight loans and by making equity-type investments that give the SBIC actual or potential ownership of the small firm's equity securities. Also provide management assistance to the businesses they help finance.

commercial banks are...

the dominant supplier of external financing to small firms.

When equity is the owner's share of the firm's assets,

the nature of this claim depends on the legal form of ownership.

SBICs prefer...

to make loans to small firms rather than equity investments.

Those few firms that experience rapid growth, or those that must maintain a high level of accounts receivable...

use external financing frequently.

Banking institutions charge a higher rate of interest-

usually two or three percentage points above the prime rate- to small companies to offset the greater risk; the result is a greater return.