Financing
Networking is one of the best ways to find angels, who usually prefer to invest in local businesses operating in industries they know something about.
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Not only must a company meet SEC requirements for a public offering, but it also must meet securities laws in all states in which the issue is sold.
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When financing a small company's purchase of real estate, a bank typically will lend up to 75 to 80 percent of the property's value and will allow repayment schedules of 10 to 30 years.
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When the SBA makes a loan guarantee, banks are willing to consider riskier deals that they normally would refuse.
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A boat retailer would most likely use a line of credit to finance the purchase of her inventory.
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A business owner does not pay interest on a floor-planned item in inventory until it is sold.
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Commercial banks are lenders of last resort for small businesses.
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Most entrepreneurs seeking money to launch their businesses need more than $100,000 in startup capital.
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Businesses can use Low Doc loans for working capital, machinery, equipment, and real estate.
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Private placement debt is a hybrid between a conventional loan and a bond.
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Unlike equity financing, debt financing does not require an entrepreneur to dilute her ownership interest in the company.
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A company involved in an initial public offering may sell its shares of stock before the effective date of the offering as long as the investors are accredited.
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A line of credit is a form of financing employed by sellers of big-ticket items such as cars, boats, and furniture, which the retailers pledge as collateral against the loan.
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A typical venture capital firm seeks investments in the $20,000 to $50,000 range and annual returns of 35-50 percent over three to five years.
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Angels are not a good source of financing for entrepreneurs seeking relatively small amounts of money, as they typically do not make investments of less than $1 million.
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Banks prefer to make loans to business startups because although the risk level is higher, the potential returns are also much higher.
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Because small businesses typically borrow small amounts of money, they pay interest rates below the "prime rate."
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Even the smallest businesses find it easy to sell bonds as a source of capital.
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For the typical small company, the cost of a public offering is around 30 percent of the capital raised.
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If banks refuse to lend money to a startup business, the owner usually cannot convince his vendors and suppliers to extend trade credit to him either.
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In an SBA loan guarantee, the SBA determines the loan terms, including the interest rate, which is usually set at or below market rate.
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Inventory-only deals are the easiest form of asset-based financing to obtain because banks like to have "tangible" assets backing a loan.
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Leasing is not an effective method for entrepreneurs to reduce the long-term capital requirements of their businesses.
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Loans from stockbrokers carry higher interest rates since the collateral-stocks and bonds in the borrower's portfolio-involve a high level of risk.
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Most small businesses that borrow money pay the prime interest rate minus one or two percentage points due to the risk/return tradeoff.
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One of the disadvantages of angels is that they are typically not willing to wait more than three years to cash out their investments.
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Only about half of the companies that attempt a public stock offering ever complete the process.
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Private investors, or angels, seek 60 to 75 percent annual return-on-investment, which is much higher than those of professional venture capitalists, and tend to take a 51 percent + share of the business.
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Rather than piecing together their startup capital from multiple sources as they have in the past, entrepreneurs now are relying on a single source of funding.
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Savings and loan associations specialize in loans for the purchase of inventory and for working capital.
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Since their stock offerings are small, most entrepreneurs are able to take their companies public without the assistance of accountants, attorneys, and underwriters.
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The average interest rate on SBA-guaranteed loans is prime-minus-2-percent.
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The average loan in the SBA's Microloan Program is $100,000 with a three-year repayment term.
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The majority of the loans a commercial finance company makes are unsecured by collateral.
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Typically, a lender is willing to lend a small business owner 100 percent of the value of accounts receivable pledged as collateral
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Venture capital companies invest only in companies in the startup phase.
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Venture capital firms rarely take an active role in managing the business in which they invest.
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Working capital is not related to the seasonal fluctuations of a business but is needed when a company is expanding.
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Working capital is the financing used to purchase a business's permanent assets such as buildings, land, and equipment.
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A company that is experiencing rapid expansion has similar capital requirements as those of a fledgling business.
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A public stock sale is an effective method of raising large amounts of capital, but it can be an expensive and time-consuming process filled with regulatory nightmares.
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A small company needs fixed capital to purchase its permanent assets.
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After an entrepreneur invests his own money for startup, he will typically seek additional financing from friends and family next.
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An option for acquiring equity capital is for the entrepreneur to take on partner(s); however, it is important that he consider the impact of giving up some personal control over operations and of sharing profits with others.
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Asset-based borrowing enables a small company to borrow money by pledging otherwise idle assets such as accounts receivable and inventory.
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Asset-based loans are an expensive method of financing because of the cost of originating and maintaining them and the higher risk involved.
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Banks tend to be very conservative in their lending practices and prefer to make loans to established small businesses rather than to high-risk business startups.
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Capital is any form of wealth employed to produce more wealth.
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Commercial banks are primarily lenders of short-term capital to small businesses, although they will make certain intermediate and long-term loans, normally requiring the loan to be secured by collateral.
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Commercial finance companies are willing to take more risk in making loans than commercial banks, but they also charge a higher interest rate.
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Companies issuing bonds to raise capital must follow the same regulations that govern businesses making public stock offerings
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Entrepreneurs are most likely to give up more equity in their businesses in the startup phase than in any other.
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Entrepreneurs using a Small Company Offering Registration (SCOR) can advertise their companies' stock offerings and can sell them directly to any investor with no restrictions and no minimums.
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Few companies with less than $20 million in annual sales manage to go public successfully.
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Foreign corporations invest in U.S. small businesses through strategic partnerships in order to gain access to new technology, new products, and U.S. markets.
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If an entrepreneur needs a relatively small amount of money to launch a company, angels are a primary source of funds.
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In a Rule 147 (intrastate) offering, a company may only sell its shares to investors in the state in which it is incorporated and does business.
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In a typical commercial or industrial loan, a savings and loan association will lend up to 80 percent of the real property's value with a repayment schedule of up to 30 years.
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In an initial public offering, a company raises capital by selling shares of its stock to the general public for the first time.
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In an installment loan for equipment, the loan's amortization schedule would coincide with the equipment's useful life.
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In most SBA loans, the SBA does not actually lend any money; it merely guarantees a bank repayment of a portion of the loan the bank makes in case the borrower defaults.
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In startup companies, raising capital can easily consume as much as one-half of the entrepreneur's time and take many months to complete.
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Insurance companies offer two basic types of loans: policy loans and mortgage loans.
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It is extremely difficult for a startup company with no track record of success to raise money with a public stock offering.
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Lenders of fixed capital expect the assets purchased to increase the borrowing firm's efficiency, profitability, and cash flows.
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Lending practices at credit unions are very much like those at banks, but credit unions usually are willing to make smaller loans and will loan only to their members.
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Loans made under the SBA's Disaster Loan Program carry below-market interest rates and are designed to provide assistance to small businesses that have been the victims of a variety of disasters, such as hurricanes, floods, earthquakes, and tornadoes, as well as the terrorist attacks of September 11, 2001.
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Making a public stock offering through the Small Company Offering Registration (SCOR) is easier and less expensive than a traditional public offering, with typical costs being less than half and only minimal notification to the SEC required.
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On a margin loan, if the value of the borrower's investment portfolio drops, the broker can make a margin call, requiring the borrower to provide more cash or securities as collateral, within a matter of days or even hours.
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One risk a small company runs when it is preparing to make an initial public offering (IPO) is that the stock market may be in a decline, making the IPO less attractive or impossible.
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Private investors look to earn the return on their investments in a business through the increased value of the business, not through dividends and interest.
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Publicly held companies must file periodic reports with the Securities and Exchange Commission.
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Rather than relying primarily on a single source of funds as they have in the past, entrepreneurs today must piece together their capital from multiple sources, a method known as layered financing.
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SBIC financing would be attractive to an entrepreneur whose primary concern is maintaining majority ownership in her business, as SBICs are prohibited from obtaining a controlling interest in the companies in which they invest.
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SBICs, privately owned financial institutions that are licensed and regulated by the SBA, provide both debt and equity financing to small businesses.
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SSBICs provide financing to small businesses that are at least 51 percent owned by minorities or socially or economically disadvantaged people.
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Small Business Lending Companies (SBLCs) make only intermediate and long-term SBA-guaranteed loans that many banks would not consider.
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The Economic Development Administration offers loan guarantees to create new businesses in economically depressed areas with below-average incomes and high unemployment rates.
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The SBA's Section 504 Certified Development Company Program (CDC), which provides long-term, fixed-asset financing, is designed to encourage small businesses to expand their facilities and to create jobs.
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The U.S. Department of Agricultures Rural Business Co-op Service provides financial assistance to businesses that create non-farm employment opportunities in rural areas.
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The World Wide Web offers entrepreneurs, especially those looking for relatively small amounts of money, the opportunity to discover sources of funds that they otherwise might miss.
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The biggest benefit of a public stock offering is the capital infusion the company receives.
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The capital ceiling on a Small Company Offering Registration (SCOR) is $1 million (except in Texas, where there is no limit), and the price of each share must be at least $5.
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The creator of a computer software program and the originator of a small manufacturing process would likely have the same capital requirements.
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The goal of regulation S-B's simplified registration process is to make it easier for small companies to go public by cutting the paperwork and the costs of raising capital.
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The largest cost to a company making a public offering is the underwriter's commission.
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The longer loan terms of SBA loans are ideally suited for young, cash-strapped companies.
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The most common form of secured credit is accounts receivable financing in which businesses can usually borrow an amount equal to 55-80 percent of its receivables.
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The most important ingredient that venture capitalists look for in judging the potential success of a small business is a competent management team.
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The purpose of the road show coordinated by the underwriter of an initial public offering (IPO) is to promote interest in the IPO among potential syndicate members.
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The single most important ingredient in making a successful initial public offering is selecting a capable underwriter to manage the process.
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The typical letter of intent states that the underwriter of a stock issue is not bound to the offering until it is executed, usually the day before or the day of the offering.
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To reduce the paperwork required and speed up its loan application process, the SBA has instituted the Low Doc Loan Program, which allows small businesses to use a simple one-page application, cutting response time significantly.
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To speed up loan processing times, an entrepreneur seeking an SBA loan guarantee should work with a bank that is either a certified (CLP) or a preferred (PLP) lender.
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Two factors that make a deal attractive to venture capitalists include high returns and a convenient and profitable exit strategy.
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Under factoring deals "with recourse," the small business owner bears the risk of uncollected accounts receivable; under factoring deals "without recourse," the factor bears the loss.
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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.
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Vendors and suppliers often are willing to finance a small business owner's purchase of goods for 30 to 60 days, interest free, which is usually easier for small businesses than obtaining a bank loan.
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Venture capital companies reject 90 percent of the proposals they receive because they don't meet the firms' investment criteria.
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While equity capital represents the personal investment of the owner(s) of a business and does not have to be repaid, debt capital is a liability that must be repaid with interest in the future.
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