Chapter 14: Small Business Finance: Using Equity, Debt, and Gifts

Activity ratios

They calculate how productive a particular asset is in producing sales activity.

A(n)______ is an SBA-approved partner that offers SBA-guaranteed loans of under $50,000 to eligible small businesses.

microlender

______ debt are loans that do not allow a lender to seize specific assets in the event of nonpayment.

Unsecured

A(n) ______ is an organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area.

community development organization

Loans that provide the lender with the legal right to seize specific assets in the event of nonpayment is called Blank______ debt.

secured

A______ is a private business that is authorized to make SBA-insured loans to start-ups and small businesses.

small business investment company (SBIC)

Identify an important consideration when giving a gift to help someone start or continue their business.

Consider nonvoting stock, if the gift is an equity investment.

Identify a suggestion for businesses to succeed in crowdfunding.

Create a snappy, professional-looking video about the business.

is the level of probability that an investment will not produce expected gains.

Risk

A business that collects, organizes, and details data concerning an entity's use of debt is referred to as a _____.

credit reporting agency (CRA)

Which of the following are the broad categories of financial ratios? (Check all that apply.)

Activity ratios Liquidity ratios Profitability ratios Leverage ratios

Which of the following is a reason that bootstrapping is common among small business start-ups?

Banks do not lend money to start-up businesses.

Which of the following statements about debt are correct? (Check all that apply.)

It can take many forms and be both secured by an asset and unsecured like when borrowing using a credit card. Businesses may borrow from many sources like banks, development agencies, governments, and individuals. It is a claim on the value of assets that a business owns. Banks and other creditors can force a business into bankruptcy if it does not pay it debt. The federal government provides loan guarantees for small businesses through the SBA to make borrowing easier

Identify an advantage of borrowing money for capital investment.

It improves the potential for greater rates of return for business owners.

Which of the following statements about accelerators are correct? (Check all that apply.)

Most accelerators take an equity stake in the companies they help. They tend to specialize in companies in a specific segment like biotechnology, fashion, women-owned firms, etc. The goal is to accelerate a start-up from its early stages to being ready to pitch for investment

Which of the following is a benefit of using outside equity?

Outside investors often bring new ideas, processes, and procedures to existing businesses.

Which of the following are important considerations when giving a gift to help someone start or continue their business?

The agreement should specifically state that it is a gift. Put the agreement into writing. If it is a loan, the agreement should outline the payment terms including the interest rate.

Which of the following are reasons business owners should use outside equity. (Check all that apply.)

The business will not have increased costs in the form of interest. Outside equity lessens the owner's exposure to financial los

______ risk is the uncertainty of returns and losing money.

Financial

Which of the following is true of royalty financing?

It involves an investor providing funds to a business for a contractual percentage of the revenues of the firm for a contractual period.

Which of the following statements regarding cost of capital is true?

The lower the cost of capital of a business, the more profits the owner can keep for himself of herself.

Identify a strategy for maximizing the value of a business's employees.

Use of contractors

Using low-cost or free techniques to minimize the cost of doing business is called

bootstrapping

A___ is a gift of money made to a business for a specific purpose.

grant

Recovering the value of investment through a sale of a firm or its assets is known as a

harvest

______ is/are payments of profits to the owners of corporations.

Dividends

Identify the primary credit reporting agencies (CRAs). (Check all that apply.)

Experian TransUnion Innovis Equifax

Identify the reasons that bootstrapping is common among small business start-ups. (Check all that apply.)

External equity capital is not accessible for a majority of small business start-ups. Business owners usually do not want to share ownership.

True or false: Dividends are a charge for the use of money and is usually calculated as a percentage of the principal.

False

______ is a measure of the amount of debt relative to total investment.

Financial leverage

Which of the following statements regarding microlenders are correct? (Check all that apply.)

Loans require less paperwork than regular Small Business Administration backed loans. They can only lend up to $50,000. Loans are guaranteed by the Small Business Administration.

Which of the following statements regarding bootstrapping are correct? (Check all that apply.)

The majority of small business start-ups are funding by bootstrapping. Business owners often use their own capital and the funds generated by operating the business to finance the business' start-up and growth. Studies report that between 90 and 95% of start-up business are initially funded through bootstrapping.

Which of the following statements regarding borrowing are correct? (Check all that apply.)

The owner's character is an important lending criteria and it is judges by his or her personal credit rating. No matter the form of business, the lender makes the loan to the owner, not the business. The owner is not separated from the business, in fact the business is considered an extension of the owner.

Which of the following statements about grants are correct? (Check all that apply.)

The purpose of grants is to increase economic activity, provide job growth, and increase the overall standard of living for citizens. The U.S. government, most state governments, and semiprivate and private economic development agencies offer grants. The SBA offers a loan and grant search tool for small business owners.

Which of the following statements regarding collateral are correct? (Check all that apply.)

The value of collateral is simply the estimated market value of the asset being used. Most intangible assets are not thought to be good collateral. Collateral can include stocks, bonds, and physical goods, like land.

Liquidity ratios

They determine a business's capacity to pay debts and expenses that are due in the current accounting period.

Leverage ratios

They determine the relative risk that a business problem could cause bankruptcy.

Which of the following statements regarding angel investors are correct? (Check all that apply.)

They like businesses that are located near them. They invest their own money. They invest in businesses due to their personal interest and as a personal investment. They typically invest between $50 and $250K.

True or false: An advantage of borrowing money for capital investment is that borrowing permits the owners to keep a higher level of control of the business.

True

Debt is

a legal obligation to pay money in the future.

Financial leverage is

a measure of the amount of debt relative to total investment.

A small business investment company is

a private business that is authorized to make SBA-insured loans to start-ups and small businesses.

A(n) ______ is an organization that supports start-ups with a financial investment, free or inexpensive space, mentoring, and other services.

accelerator

Wealthy individuals who invest in companies in relatively early stages of their development are called

angel investors

Something of value given or pledged as security for payment of a loan is called

collateral

A(n) ______ is an SBA-approved partner that offers SBA-guaranteed loans of under $50,000 to eligible small businesses.

microlender

The amount that revenues exceed expenses is known as

profit

A method of obtaining capital in which investors give money to a business in return for a guaranteed percentage of revenues is referred to as

royalty financing

An equity investor's primary concern is

the firm's growth potential.

A partnership business form is

when two or more people cooperating to conduct a business enterprise.

Which of the following statements regarding unsecured debt are correct? (Check all that apply.)

A lender would generally have to file a lawsuit or force the business into bankruptcy to collect the unpaid debt. The lender cannot seize any specific asset in the event of nonpayment. These loans are often based on the business' character.

Which of the following is a strategy for maximizing the value of business's employees? (Check all that apply.)

Hire student interns, as they often are talented, motivated, and cost less than other employees. Use overtime for times of temporary increased business.

Which of the following statements regarding secured debt are correct? (Check all that apply.)

It is the debt that is secured by specific assets that can be seized for nonpayment. Commercial banks and credit unions make secured loans. Asset loans are usually secured by large assets like automobiles, machinery, and other equipment.

Which of the following statements regarding outside equity are correct? (Check all that apply.)

These individuals are called investors, since they are lettering a business owner use their money now in order to get wealth in the future. People who buy ownership rights in a business are considered outside equity investors. They are said to be outside, since they are not part of the business' management. It is called equity, because the investors have legal ownership rights to the business.

Profitability ratios

They calculate management efficacy in generating wealth from sales and from invested funds.

Which of the following statements about tax credits are correct? (Check all that apply.)

They reduce amount of taxes that a business will pay. They are used to encourage investment in specific types of assets, economic activities, or other purposes. They may be provided by federal, state, ore even local governments.

A(n)______ is an organization that supports start-ups with a financial investment, free or inexpensive space, mentoring, and other services.

accelerator

Which of the following are one of the Four Cs of borrowing? (Check all that apply.)

Capacity of the business to repay the loan. Conditions of the industry and economy in which the business operates. Collateral that can be used to secure the loan. Character of the business' owners.

Gift capital can be termed as capital resources that neither provide any ownership nor require any repayment to the giver.

True

The cost of ___ is the percentage cost of obtaining future funds.

capital

A community development organization is

an SBA organization that is authorized to make insured loans to small businesses that are expected to increase economic activity in an area.

______ is a legal obligation to pay money in the future.

Debt

A ______ is a legal "artificial" entity that is formed by filling specific documents with a state government.

corporation

Risk is

the level of probability that an investment will not produce expected gains.

Financial risk is

the uncertainty of returns and the probability of losing money.

______ is a direct reduction in the amount of taxes that must be paid, dependent on meeting some legal criteria.

tax credit

Which of the following statements regarding profitability are correct? (Check all that apply.)

Profitability is a primary measure of the business' capacity to repay loans. The business' capacity to earn profits is the most single factor for being able to borrow significant amounts of money. Cash flows from operations that have been consistent indicate that the business can reliably convert profits to cash.

Which of the following are suggestions for businesses to succeed in crowdfunding? (Check all that apply.)

Write a business plan to show how the business will work to earn profits. Create an enthralling story to convince potential funders of the value of the plan. Document the business as it will have to be a corporation or an LLC.

A corporation is a

legal "artificial" entity that is formed by filling specific documents with a state government.

A ___ is a gift of money made to a business for a specific purpose.

grant

A ______ form of business ownership is two or more people cooperating to conduct a business enterprise.

partnership

______ capital is capital resources that neither provide any ownership nor require any repayment to the giver.

Gift

______ equity is money from selling part of the business to people who are not and will not be involved in the management of business.

Outside