Question 1

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.

Accepted Answer

This statement is true. When the value of the investment portfolio drops, the broker may require the borrower to provide additional cash or securities to maintain the required loan-to-value ratio, which could trigger a margin call. The borrower typically has a limited amount of time to meet the call, usually a matter of days or even hours, or face the potential of the broker liquidating the portfolio to cover the outstanding loan balance.

Question 2

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

Accepted Answer

SBICs (Small Business Investment Companies) are privately owned financial institutions that are licensed by the Small Business Administration (SBA) to provide financing to small businesses, including both debt and equity financing.

Question 3

Savings and loan associations specialize in loans for the purchase of inventory and for working capital.

Accepted Answer

Savings and loan associations specialize in mortgage loans for the purchase of real estate, not loans for inventory or working capital.

Question 4

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

Accepted Answer

Private placement debt involves a private company issuing debt securities directly to investors (usually institutional investors) rather than going through the public markets. This makes it similar to a bond in terms of the type of investment vehicle, but the terms of the debt can be customized to meet the needs of both the borrower and the lender, making it more like a conventional loan in terms of flexibility.

Question 5

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

Accepted Answer

Commercial finance companies typically provide loans that are secured by collateral, such as inventory, accounts receivable, or other assets, to reduce their risk.

Question 6

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

Accepted Answer

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

Question 7

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.

Accepted Answer

While banks refusing to lend may indicate financial risk, vendors and suppliers may still extend trade credit based on their own assessment of the business's potential, relationship history, or strategic interests.

Question 8

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.

Accepted Answer

SBICs are required to maintain a non-controlling interest in the companies they invest in, making it an attractive option for entrepreneurs who want to maintain majority ownership in their businesses.

Question 9

Commercial finance companies are willing to take more risk in making loans than commercial banks, but they also charge a higher interest rate.

Accepted Answer

Commercial finance companies specialize in providing financing to businesses that may not meet the strict lending requirements of commercial banks, so they are willing to take on more risk. However, to compensate for the increased risk, they usually charge higher interest rates than commercial banks.

Question 10

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.

Accepted Answer

SBAExpress loans typically have a maturity of 5 to 10 years, but for fixed assets, the maturity can be up to 25 years. Additionally, the average SBAExpress loan size is $50,000.

Question 11

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

Accepted Answer

The SBA loan guarantee provides an extra level of security for banks, making them more willing to approve loans for businesses that they may consider too risky without the guarantee.

Question 12

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.

Accepted Answer

Most equipment vendors offer financing options to encourage business owners to purchase their equipment, which is similar to trade credit where buyers receive goods or services now and make payments later.

Question 13

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

Accepted Answer

This statement is true. The Economic Development Administration (EDA) provides loan guarantees to support the creation of new businesses in areas that are struggling economically, including those with below-average incomes and high unemployment rates. These loan guarantees can help to stimulate economic growth and job creation in these communities.

Question 14

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.

Accepted Answer

This is a common practice for commercial or industrial loans offered by savings and loan associations. The loan amount is usually limited to 80 percent of the property's appraised value, and the borrower has up to 30 years to repay the loan.

Question 15

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.

Accepted Answer

This is a common practice known as "trade credit." Vendors and suppliers often extend credit to their customers as a way to build stronger relationships and encourage repeat business. This can be a helpful source of financing for small businesses, as it doesn't require collateral or a lengthy approval process like a bank loan would. However, it's important to be responsible with this credit to maintain good relationships with suppliers and avoid taking on too much debt.

Question 16

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

Accepted Answer

Loans from stockbrokers typically have lower interest rates than other loans because the stocks and bonds in the borrower's portfolio serve as collateral, reducing the level of risk for the lender.

Question 17

Small business lending companies (SBLCs) make only intermediate and long-term SBA-guaranteed loans that many banks would not consider.

Accepted Answer

SBLCs specialize in providing SBA-guaranteed loans that are typically medium to long-term in nature, which may not be offered by traditional banks.

Question 18

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.

Accepted Answer

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

Question 19

Competing for Small Business Innovation Research Program (SBIR) loans is intense; only 7 percent of the small companies that apply receive funding.

Accepted Answer

The SBIR program provides grants, not loans, to small businesses for research and development.

Question 20

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.

Accepted Answer

This statement is true. Credit unions and banks generally have similar lending practices, but credit unions may have more flexibility in terms of loan amounts and may only lend to their members.

Quiz 13: Sources of Financing: Debt and Equity