Chpt 12

Which of the following is a potential risk of raising equity-based crowdfunding? a. Backers might have voting rights, which make later investments easier. b. Detailed financials and other potential trade secrets are made public to investors not known to the management team. c. Because all investors must be accredited through the SEC, there are fewer prospective backers. d. Backers must come from the same regional area as the company seeking funding.

B

During early-stages of a business, equity financing is preferred to debt financing because: a. Outside investors like to see a founder put "skin in the game." b. Paying interest on debt is generally unaffordable for a new business. c. Venture capitalists like to invest in businesses that are just getting started. d. A and B

D

What is the main reason that debt is viewed as a riskier source of funding than equity?

Debt creditors insist on being repaid regardless of a firm's cash flows.

There are four basic approaches to crowdfunding:

Donations Rewards Pre-purchases Equity investing

Bankers 3 priotrities

Recouping the principal of the loan Determining the amount of income the loan will provide the bank Helping the borrower be successful and become a larger customer

Down payment required for an equipment loan?

25-35% 3-5 years

Accounts payable or trade credit loan duration

30 days

must have an income of at least $200,000 or a net worth of at least $1 million, not including the primary residence.

Accredited investor

Certified Development Company (CDC) 504 Loan Program

An SBA loan program that provides long-term financing for small businesses to acquire real estate or machinery and equipment.

7(m) Microloan Program

An SBA loan program that provides short-term loans of up to $50,000 to small businesses and not-for-profit child-care centers.

Small Business Innovative Research (SBIR) Program

An SBA program that helps to finance small companies that plan to transform laboratory research into marketable products.

loan covenants

Bank-imposed restrictions on a borrower that enhance the chance of timely repayment.

If you see "2/10, net 30" on a trade-credit term sheet, what does this mean? a. The net amount is due on February 10th. b. The entrepreneur has 30 days to pay after February 10th. c. While the full invoice amount is due in 30 days, a 2 percent discount will be available if paid within 10 days. d. While the full invoice amount is due in 30 days, a 2 percent increase will be applied if paid within 10 days.

C

What term identifies an unsecured note that is usually due in less than 270 days? a. Account receivable b. Line of credit c. Commercial paper d. Credit card

C

5 C's of credit

Character, Capacity, Capital, Collateral, Conditions

True or False? As a rule, if a firm's return on assets is lower than the cost of debt (interest rate), the owner's return on equity will increase as the firm uses more debt.

F

True or False? Crowdfunding usually involves raising small amounts of money from many people who must be accredited investors.

F

True or False? Most small companies ultimately receive venture capital funding.

F

informal venture capital

Funds provided by wealthy private individuals to high-risk ventures.

Factoring

Obtaining cash by selling accounts receivable to another firm.

purchase-order financing

Obtaining cash from a lender who, for a fee, advances the amount of the borrower's cost of goods sold for a specific customer order.

Return on assets =

Operating profits/total assets

Business angels

Private individuals who invest in others' entrepreneurial ventures.

Small business investment companies (SBICs)

Privately owned banks, regulated by the SBA, that provide long-term loans and/or equity capital to small businesses.

True or False? A private placement allows an entrepreneur to avoid many of the demanding requirements of the securities laws.

T

True or False? One of the biggest potential values and risks of raising money from business angel investors is their experience in your industry or marketplace. a. True b. False

T

3 reasons for leasing equipment

The firm's cash remains free for other purposes. Available lines of credit can be used for other purposes. Leasing provides a hedge against equipment obsolescence.

Four basic characteristics of a business significantly affect how it is financed:

The firm's economic potential. The size and maturity of the company. The nature of its assets. The owner's personal preference with respect to using debt or equity.

initial public offering (IPO)

The issuance of stock to be traded in public financial markets.

To make an informed decision, a small business owner needs to understand the trade-offs between debt and equity with regard to the following three factors:

The potential profitability for the owners. The business's financial risk. Who will have voting control of the business.

private placement

The sale of a firm's capital stock to select individuals.

The best description of the current (as of early 2015) state of equity-based crowdfunding is: a. Only accredited investors can make actual equity investments. b. Anyone can now invest online in any business seeking funding. c. All investors must meet the entrepreneur in person before investing in the business. d. Once one accredited investor has invested in a deal, non-accredited investors can then join in that deal

a

What key criterion is used by a bank to evaluate whether to offer a loan to an entrepreneur?

b. The personal credit histories of the entrepreneur and founding team

If a firm's return on its assets (operating profits ÷ total assets) is greater than the .........., the owner's return on equity will increase as the firm uses more debt.

cost of the debt (interest rate)

Return on equity

net profits/total owners equity

Intangible assets include

patents, trademarks, copyrights, franchises, and goodwill

True or False? A unique financing option could come from a large corporation interested in the research that a small business is working on. a. True b. False

t

A banker specifically considers two types of assets when evaluating a firm for a loan:

tangible assets and intangible assets

On average, about ..... of a venture capitalist's investments are in later-stage businesses

three quarters

Beyond personal savings, friends and families provide how much of the financing of private businesses?

80%

What percent of firms lease at least some of their equipment?

80%

asset-based loan

A line of credit secured by working capital assets.

formal venture capitalists

Individuals who form limited partnerships for the purpose of raising venture capital from large institutional investors.

Tangible assets, which can be .....

seen and touched, include inventory, equipment, and buildings Included on the balance sheet

True or False? The investment criteria used by banks and venture capitalists are essentially the same.

Falso

Community-based financial institutions

A lender that uses funds from federal, state, and private sources to provide financing to small businesses in low-income communities.

chattel mortgage

A loan for which items of inventory or other movable property serve as collateral.

7(a) Loan Guaranty Program.

A loan program that helps small companies obtain financing through a guaranty provided by the SBA

real estate mortgage

A long-term loan with real property held as collateral.

When asking friends and/or family for financing, what was not recommended as a necessary step in the video? a. Treat the financing like a loan, and agree to specific terms including interest rates. b. Make certain both parties hire lawyers to help draft documents outlining terms and conditions of the loan. c. Arrange a repayment plan with specific repayment timelines. d. Make sure everything is in writing and that all parties are in agreement on specific terms.

B

Loan covenants are one way a bank can help mitigate the risk it takes when lending money to an early-stage company. Which of the following is an example of a covenant it might impose? a. The banker can show up at the place of business unannounced at any time she or he wants. b. The business must maintain 50 percent of the total loan value in cash at all times. c. The managers/owners of the business must have salary caps. d. The business cannot sell to new customers without the bank's permission.

C

Which of the following is not a priority of a banker who is considering whether to loan money to a small business? a. Determining the amount of income the loan will provide the bank. b. Helping the borrower be successful and become a larger customer for the bank. c. Recouping the principal of the loan. d. Preventing competing banks from loaning money to the business.

D

True or False? If an entrepreneur is intentional about maintaining 100 percent control over his business, raising money from equity investors is the best form of financing he can choose.

F

True or False? The value of a firm's assets, to be used as collateral for a bank loan, are found on the company's income statement.

F They are on the balance sheet

is an arrangement with a loaning entity that purchases a business's accounts receivable and advances the business a percentage.

Factoring

What is a "best practice" for raising money from friends and family?

First raise matching funds from an outside source.

A ..... is an informal agreement between a borrower and a bank concerning the maximum amount of funds the lender will provide at any given time.

Line of credit

True or False? The name of the SBA loan program focused on helping finance firms that transition laboratory research into marketable products is the Small Business Innovative Research (SBIR) Program.

T

The five primary SBA programs follow:

The 7(a) Loan Guaranty Program The Certified Development Company (CDC) 504 Loan Program The 7(m) Microloan Program Small business investment companies (SBICs) The Small Business Innovative Research (SBIR) Program