Question 1

Barry needs financing to start his inner-city venture.His goal is to provide part-time employment for at-risk youths to keep them off the streets and engaged in learning marketable skills.Barry may find some assistance from:

Accepted Answer

A community-based financial institution is the best choice for Barry as they are typically more willing to invest in local businesses with social impact goals, such as providing employment opportunities for at-risk youth. They may also be able to provide guidance and support to Barry beyond just financing. The other options listed may be more focused on profit and may not align as closely with Barry's social impact goals.

Question 2

Stefan owns a lumber yard and has a R500 000 purchase order from a construction company.His cost of goods sold for this order is R300 000.Because his company needs working capital, the most logical loan for the lumberyard would be to use ________.

Accepted Answer

Purchase order financing is a type of short-term lending that helps businesses fulfill orders from clients by paying suppliers for the goods needed to fill the order. In this case, Stefan can use purchase order financing to pay the supplier for the cost of goods sold, which frees up the revenue from the order for working capital. This allows Stefan's lumberyard to fulfill the purchase order and maintain their business operations without sacrificing cash flow. Option A, an equipment-based loan, is not relevant to the purchase order and would not address the immediate need for working capital. Factoring (Option B) is a type of financing where a company sells its invoices to a third party, but this option would not be necessary if the lumberyard has the purchase order in hand. Asset-based financing (Option D) uses the company's assets as collateral for a loan, which also does not address the immediate need for working capital.

Question 3

Venture capital companies:

Accepted Answer

Venture capital companies are often limited partnerships that raise capital from other investors, such as high net worth individuals, institutional investors, and sometimes even governments. These funds are then used to invest in new or expanding businesses in exchange for an ownership stake, with the goal of earning a significant return on investment in the future. This type of financing is typically not available to large, established companies, as they have other options such as public markets or bank loans.

Question 4

In groups of business angels:

Accepted Answer

In groups of business angels, individual angels make personal decisions about whether or not to invest. Each business angel is free to decide whether they want to participate in an investment opportunity, and their decision does not affect the other angels' choices. This allows for more flexibility and a greater likelihood of investment in promising startups. Options A and B would require unanimous or majority agreement, which could hinder or delay investment opportunities. Option D would require all angels to invest, which may not be feasible or desirable for all individuals.

Question 5

Many venture capitalists:

Accepted Answer

Many venture capitalists intend to cash out after five to seven years by selling their shares either to the company or to other investors. A is incorrect, as it only applies to certain situations. B is incorrect, as managing the liquidation of failed ventures is typically done by the company's management team or other professionals hired for that purpose. D is incorrect, as not all venture capitalists insist on voting rights and it can vary depending on the terms of the investment.

Question 6

Isaac is looking for a business angel.His best chance of finding one is through:

Accepted Answer

Business angels typically prefer to invest in companies that have been recommended to them by someone they know and trust. Therefore, networking with business associates, accountants, and lawyers can be the best way to find a potential business angel who can provide funding and expertise to Isaac's business. Option B may also be fruitful as his banker may have knowledge of investors is their network. However, options C and D are less optimal, as advertising in magazines may not yield credible leads, while friends and relatives may not have the financial capability to invest or the necessary business acumen.

Question 7

Miracle Fund (Pty) Ltd., is a venture capitalist.In exchange for providing venture capital, Miracle Fund:

Accepted Answer

In exchange for providing venture capital, Miracle Fund typically receives the right to own a percentage of the entrepreneur's business, allowing them to potentially realize a return on their investment through the growth and success of the company. This is a common arrangement in venture capital agreements. The other options listed (paying interest, taking a percentage of earnings, becoming a general partner) are not typically part of a venture capital agreement.

Question 8

Irwin has applied for a loan from an asset-based lending company.As security he will offer:

Accepted Answer

Accounts receivable and inventory are typical assets used as collateral for asset-based lending, as they represent a company's liquid assets that can be easily converted to cash. Land and buildings may be too difficult to liquidate quickly in the event of default, and equipment may have limited resale value. Inventory and equipment may also be considered, but accounts receivable are typically the most valuable asset for this type of lending.

Question 9

A drawback to "going public" is:

Accepted Answer

Going public involves complying with numerous regulatory requirements imposed by the Securities and Exchange Commission (SEC) and other regulatory agencies. These requirements can be time-consuming and expensive, which can be a drawback for companies considering going public.

Question 10

Gerrie, Lethabo and Arnav are a group of friends who have formed a company to raise capital for an investment in 20 franchises of Bennie's, a new sports bar concept.Arnav will be the general partner; Gerrie and Lethabo will be limited partners.These three are:

Accepted Answer

The answer of Gerrie, Lethabo and Arnav are a group...

Question 11

Before accepting money from a business angel, the entrepreneur should:

Accepted Answer

It is crucial for the entrepreneur to ensure that the business angel is accredited before accepting money to avoid potential fraud or legal issues. Checking the accreditation of the angel can help the entrepreneur verify their credentials and investment experience, reducing the risk of investment failure. Therefore, making sure the business angel is accredited is the best choice.

Question 12

The national government primarily provides funds to small businesses through:

Accepted Answer

The national government primarily provides funds to small businesses through various small business funding programmes, such as the Small Business Administration (SBA) in the USA or the Small Business Finance Agency in Australia. These programmes offer loans, grants, and other forms of financial assistance to help small businesses start, grow, and succeed. While venture capital companies and business angels may also provide funding to small businesses, these sources are typically private and not government-funded. The Financial Services Board may regulate small business financing, but it is not a direct source of government funding for small businesses.

Question 13

Eric has decided to invest R10 000 into his neighbour's new company.The money will be used in the early stages of development.Eric is considered a:

Accepted Answer

Eric is considered a business angel as he is investing money in the early stages of development of his neighbour's company. Business angels are individuals who provide financial backing to startups or early-stage businesses in exchange for equity. They usually invest their own money and provide support in terms of advice and networks. Venture capitalists, on the other hand, typically invest larger amounts of money in more mature businesses and are usually part of a larger investment firm. Loan specialists deal with providing loans, while business contributors is not a common term in the context of investment.

Question 14

Business angels, as opposed to venture capitalists, provide:

Accepted Answer

Business angels provide informal venture capital, which means they invest in early-stage, high-potential companies in exchange for equity ownership. They also often provide mentorship and industry connections to help the company grow. Option A (asset-based loans) and option D (trade credit) are forms of debt financing, while option B (factoring) involves selling accounts receivable to a third party for a discounted price in order to receive immediate cash. These are not services typically provided by business angels.

Question 15

Suzaan has decided to raise working capital for her upscale boutique business which currently has four locations and is considering franchising the concept in the next few years.Because of the current company organisation and anticipated future plans, the most likely form of financing would be ________.

Accepted Answer

The answer of Suzaan has decided to raise working capital...

Question 16

The type of financing Karabo received from a business angel is known as:

Accepted Answer

Karabo received financing from a business angel, which falls under informal venture capital because the funding came from an individual investor rather than a formal venture capital firm or financial institution.

Question 17

Private placement:

Accepted Answer

Private placement involves selling equity to a select group of investors, such as institutional investors or wealthy individuals, rather than the general public.

Question 18

Kamogelo's customers have been a little slow in paying their invoices, and he is short on cash to pay his quarterly taxes.Kamogelo should consider:

Accepted Answer

Factoring involves selling accounts receivable at a discount to a third-party financial company. This provides immediate cash flow for Kamogelo to cover his quarterly taxes and ongoing business expenses. It also transfers the risk of late payment to the financial company, freeing up Kamogelo's time to focus on other aspects of his business. Sending customers to collections or putting them on credit hold could damage Kamogelo's relationships with his clients, whereas taking out a personal loan may not provide enough immediate cash flow and could put Kamogelo in personal debt.

Question 19

Sandra is a business angel who is looking for a start-up company in which to invest.Which company would she most likely invest in based on current research?

Accepted Answer

A company that currently has fewer than 20 employees and has plans to grow is most likely to receive investment from a business angel. Business angels typically invest in early-stage companies with high growth potential.

Question 20

Connie owns a small but growing company that produces gorilla glass for smartphones.One possible source of funding might be:

Accepted Answer

Samsung is a potential investor as they sell smartphones and can benefit from using gorilla glass in their products. The other options are not as relevant to the production of gorilla glass for smartphones.

Quiz 12: A Firms Sources of Financing