BA109 Quiz 13

A business owner does not pay interest on a floor-planned item in inventory until it is sold.

False

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.

False

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.

False

Banks prefer to make loans to business start-ups because although the risk level is higher, the potential returns are also much higher.

False

Because small businesses typically borrow small amounts of money, they pay interest rates below the "prime rate."

False

Crowd funding is a process in which entrepreneurs tap their personal savings and use creative, low-cost start-up methods to launch their businesses.

False

If banks refuse to lend money to a startup business, the owner usually cannot convince his or her vendors and suppliers to extend trade credit either.

False

Loans from stockbrokers carry higher interest rates since the collateral-stocks and bonds in the borrower's portfolio-involve a high level of risk.

False

One of the disadvantages of angels is that they are typically not willing to wait more than three years to cash out their investments.

False

Only about half of the companies that attempt a public stock offering ever complete the process.

False

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.

False

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.

False

The average loan in the SBA's Microloan Program is $100,000.

False

The majority of the loans a commercial finance company makes are unsecured by collateral.

False

Venture capital companies invest only in companies in the startup phase.

False

Venture capital firms rarely take an active role in managing the business in which they invest.

False

The Boat and Ski Shop, a small retail boat shop, would most likely rely on which of the following methods to finance its inventory?

Floor planning

A recent survey by the NFIB found that 41 percent of small business owners say that the lack of capital is an impediment to the growth of their companies.

True

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.

True

Asset-based loans are an expensive method of financing because of the cost of originating and maintaining them and the higher risk involved.

True

Bank loans, retained earnings and credit cards are the most popular sources of small business financing.

True

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 start-ups.

True

Bootstrap financing describes using internal, and often creative, methods of financing a company's need for capital.

True

Bootstrapping is a process in which entrepreneurs tap their personal savings and use creative, low-cost start-up methods to launch their businesses.

True

Capital is any form of wealth employed to produce more wealth.

True

Few companies with less than $25 million in annual sales manage to go public successfully.

True

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.

True

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.

True

In an initial public offering, a company raises capital by selling shares of its stock to the general public for the first time.

True

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.

True

In startup companies, raising capital can easily consume as much as one-half of the entrepreneur's time and take many months to complete.

True

It is extremely difficult for a startup company with no track record of success to raise money with a public stock offering.

True

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.

True

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.

True

Most equipment vendors encourage business owners to purchase their equipment by offering to finance the purchase and this method of financing is similar to trade credit.

True

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.

True

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.

True

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.

True

Private placement debt is a hybrid between a conventional loan and a bond.

True

Publicly held companies must file periodic reports with the Securities and Exchange Commission.

True

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.

True

Regulation D rules minimize the expense and the time required to raise equity capital for small businesses by simplifying or eliminating the requirement for registering the offering with the SEC.

True

SBAExpress loans typically are between five and ten years, but loan maturities for fixed assets can be up to 25 years and an average SBAExpress loan is $50,000.

True

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.

True

SBICs provide financing to small businesses that are at least 51 percent owned by minorities, or socially or economically disadvantaged people.

True

SBICs, privately owned financial institutions that are licensed and regulated by the SBA, provide both debt and equity financing to small businesses.

True

The Community Advantage Loan Program provides loans to communities that have suffered a natural disaster.

True

The Economic Development Administration offers loan guarantees to create new businesses in economically depressed areas with below-average incomes and high unemployment rates.

True

The U.S. Department of Agriculture's Rural Business Co-op Service provides financial assistance to businesses that create nonfarm employment opportunities in rural areas.

True

The goal of regulation S-B and S-K'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.

True

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.

True

The single most important ingredient in making a successful initial public offering is selecting a capable underwriter to manage the process.

True

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.

True

Two factors that make a deal attractive to venture capitalists include high returns and a convenient and profitable exit strategy.

True

Unable to find financing elsewhere, many entrepreneurs launch their companies using the fastest and most convenient source of debt capital available: credit cards.

True

When the SBA makes a loan guarantee, banks are willing to consider riskier deals that they normally would refuse.

True

Private placements of debt offer all but which of the following advantages?

Variable interest rates

Selling the small company's accounts receivable outright to another business is called:

factoring.

The majority of loans provided by the SBA are:

guaranteed

The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past 9 years.

increased

A margin loan:

is a loan from an entrepreneur's stockbroker that uses the entrepreneur's investment portfolio as collateral for the loan.

Angels are an excellent source of ________ money, often willing to wait ________ years or longer to cash out their investment.

patient: 7

When a bank proves the quality of its loan decisions to the SBA and becomes a ________ lender, the bank makes the final lending decision itself, subject to SBA review.

preferred

Because of the risk/return tradeoff, small businesses that borrow money repay it with interest at the:

prime interest rate plus a few percentage points.

A ________ is a hybrid between a conventional loan and a bond; at its heart it is a bond, but its terms are tailored to the borrower's individual needs, as a loan would be.

private placement

Savings and loan associations typically specialize in loans for:

real property.

Equity capital represents the personal investment of the owner (or owners) in a business and is sometimes called ________ because of the potential outcome.

risk capital

A small business that uses factoring:

sells its accounts receivable to a third party to get the capital it needs.

The average venture capital firm screens about ________ investment proposals each year and ultimately invests in ________ of them.

1,000; 1

The Kauffman Foundation reports that the average amount of capital that entrepreneurs use to start small businesses in the U.S. is nearly:

$80,000.

Less than ________ percent of all U.S. companies are publicly held corporations.

1

Approximately ________ percent of all venture capital invested comes from corporations.

14

In discounted accounts receivable financing, a small business can typically borrow an amount equal to ________ percent of its receivables it pledges as collateral.

55 - 85

The advance rate on inventory-based loans is usually between 10 to 50 percent, but a business pledging high-quality accounts receivable as collateral may be able to negotiate up to an ________ percent advance rate.

85

A term loan:

All of these

Before making a loan to a business startup, banks prefer to see:

All of these

In a Regulation D stock offering, the company:

All of these

In an initial public offering, the underwriter, or investment banker, serves to:

All of these

Which of the following represents capital?

All of these

The second most popular SBA loan program is the ________ and designed to encourage small businesses to purchase fixed assets, expand their facilities, and create jobs. :

Section 504 Certified Development Company Program.

When evaluating a company as a potential investment target, venture capitalists look for all but which of the following?

Stable industry

The largest single source of external equity capital for small businesses is:

angels.

The loans from commercial finance companies to small businesses:

are often similar to the types of loans commercial banks offer, but commercial finance loans usually carry higher interest rates.

The most common method used by commercial finance companies to provide credit to small businesses is:

asset based.

A company pledging its inventory, accounts receivables, or fixtures as collateral for a loan is using:

asset-based financing.

When a bank makes enough SBA-guaranteed loans to become a ________ lender, the SBA promises a faster turnaround time for the loan decision, typically 3 to 10 business days.

certified

Entrepreneurs needing between $100,000 and $3 million in the current financial environment will likely find acquiring financing to be:

challenging.

A method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100 is called:

crowd funding.

If the value of the borrower's collateral drops, a stockbroker can make a ________, requiring the borrower to provide more collateral for his margin loan.

margin call

The primary disadvantage of equity capital is that the entrepreneur:

must give up some-perhaps most-of the ownership in the business to outsiders.

In inventory financing, a small business can typically borrow an amount equal to ________ percent of the inventory it pledges as collateral.

no more than 50

A(n) ________ makes only intermediate and long-term SBA guaranteed loans. It specializes in loans many banks would not consider.

small business lending company

Entrepreneurs are most likely to give up more equity in their businesses in the ________ phase of their companies than in any other.

startup

Grants to small businesses made to strengthen the local economy in cities and towns that are considered economically distressed are made by:

the Department of Housing and Urban Development.

A federally sponsored program which offers loan guarantees to create and expand businesses in areas with below-average income and high unemployment is called:

the Economic Development Administration.

Commercial banks provide ________ of loans to small business.

the greatest number and variety

The document outlining the details of the agreement between the entrepreneur and the stock underwriter is called:

the letter of intent.

The goal of the SEC's Regulation S-B and S-K is:

to open the doors to capital markets to smaller companies by cutting the paperwork and the costs normally required to make a public offering.

A/An ________ is a private, for-profit organization that purchases equity positions in young businesses that will potentially produce returns of 300 to 500 percent over five to seven years.

venture capital company