Chapter 12: Other Financing Alternatives

85

CHAPTER 12
OTHER FINANCING ALTERNATIVES
TrueFalse Questions
T.

1. Despite the high risk and costs of using a facilitator or up-front fee solicitor
to obtain financing, many start-ups never-the-less seek them as a source of
funds due to the length of time it takes to raise new funds.

F.

2. Collateral plays an important role in determining the willingness to

lend and the amount and terms of the loan, making it the most important
factor in the lending process.

F.

3. Commercial loan officers have the expertise to project new ventures

business successes, and thus are as willing to make funds available to
entrepreneurs on the same basis as other businesses.

F.

4. Because investors and commercial lenders both seek returns on the funds
given to start-up firms, entrepreneurs can obtain financing as easily from either
source.

T.

5. Because of loan restrictions, obtaining funding from commercial

lenders is prohibitive for entrepreneurs.

T.

6. Unlike traditional commercial banks, venture banks typically provide debt

to start-ups that have already received equity financing from professional
venture capital firms.

T.

7. Among start-ups, it is widely understood that bank debt (outside of Small

Business Administration loans), is not a very realistic source of financing for
ventures with less than two years operating results.

F.

8. Compensation received by commercial loan officers makes them more

likely to finance early-stage ventures.

T.

9. Warrants allow lenders to buy equity at a specified price.

F.

10. Warrants are a debt instrument frequently used by commercial banks when
financing entrepreneurial ventures.

F.

11. Credit cards issued to start-ups have proven to be an alternative source of

start-up financing.

86

Chapter 12: Other Financing Alternatives

F.

12. The returns to venture bank lenders are generated solely from interest
payments made by borrowers plus the return of the loan principal.

F.

13. Commercial banks receive a portion of their returns from warrants in

addition to the receipt of interest and the repayment of the principal that
was lent.

T.

14. By an act of Congress, the Small Business Administration (SBA) was

created for the purpose of fostering the initiation and growth of small
businesses.

T.

15. The Small Business Administration was created by an Act of Congress in

2003.

T.

16. Microloans in the SBA credit program are intended for very small
businesses with a maximum amount of $35,000 to be used for general
purposes.

F.

17. The SBAs role in its microloan credit program is to approve the loans and
guarantee up to 85% of the loan value.

T.

18. Microloans in the SBA credit program are made by not-for-profit or

government-affiliated Community Development Financial Institutions
(CDFIs).

F.

19. The SBAs venture capital credit program works through Community
Development Financial Institutions (CDFIs).

T.

20. The 7(a) loan traditionally has been the SBAs primary loan program

F.

21. SBA 7(a) loans are made usually for 1 to 3 years in amounts up to
$5,000,000, require collateral, and can be used for most business purposes.

T.

22. The SBA approves the standard 7(a) loan and guarantees up to 85% of the
loan value.

T.

23. For the 504 loan, the SBA approves and guarantees the development
companys portion of the debt but does not guaranteed the debt of the
participating commercial bank.

F.

24. Factoring is the sale of payables to a third party at a discount to their face
value.

Chapter 12: Other Financing Alternatives

87

T.

25. In a factoring arrangement, the third party makes its money by

purchasing the receivables at a discount from the total amount due on the
receivables.

T.

26. With venture leasing, one component of the return to the lessor is the
opportunity to take an equity interest in the venture.

F.

27. Receivables lending is the use of receivables as collateral for an equity

issue.

T.

28. Factoring is the selling of receivables to a third party at a discount from

their face value.

F.

29. Direct public offerings have recently become a serious challenge to

traditional venture capital firms.

Multiple-Choice Questions
a.

1. When assessing the creditworthiness of new entrepreneurs, lending

institutions review the Five Cs. The ability of the entrepreneur to repay
borrowed funds is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

b.

2. When assessing the creditworthiness of new entrepreneurs, lending

institutions review the Five Cs. The money the entrepreneur has invested in
the business, which is an indication how much is at risk if the business should
fail is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

c.

3. When assessing the creditworthiness of new entrepreneurs, lending

institutions review the Five Cs. The guarantees, or additional forms of
security (such as assets), the entrepreneur can provide the lender is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

88

Chapter 12: Other Financing Alternatives

d.

4. When assessing the creditworthiness of new entrepreneurs, lending

institutions review the Five Cs. The focus on the intended purpose of the
loan is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

e.

5. When assessing the creditworthiness of new entrepreneurs, lending

institutions review the Five Cs. The general impression the entrepreneur
makes on the potential lender or investor is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

b.

6. All of the following are common loan restrictions except?

a. limits on total debt
b. limits on total equity
c. restrictions on dividends or other payments to owners and/or
investors
d. restrictions on additional capital expenditures
e. performance standards on financial ratios

d.

7. Unlike traditional commercial banks, venture banks typically provide debt

to start-ups that have already received equity financing from professional
venture capital firms. In return for providing additional debt financing, these
venture banks receive in return all of the following except?
a. interest payments
b. repayment of principal
c. implementation of loan restrictions
d. tax breaks on the interest
e. right to buy equity at a specific price

b.

8. Bank debt is not a realistic source of financing for start-ups due to all of the
following reasons except?
a. a large portion of the assets are intangible and provide no collateral
b. payables either dont yet exist or its history is inadequate
c. the start-ups dependence on a small number of irreplaceable people
is not a good match to demand deposits or other bank liabilities
d. receivables collection track record is incomplete

Chapter 12: Other Financing Alternatives

89

e. in the event of a default, it is now plausible for the bank to install a

management team to help right the operations
b.

9. A provision that allows lenders to acquire equity at a specific price is known

as a(n):
a. factor
b. warrant
c. venture lease
d. equity carve-out

d.

10. Personal credit cards have proven to be a source of financing for start-up
firms for all of the following reasons except?
a. credit card debt is not based on the firms ability to repay, but rather
the individual card holders ability to repay
b. teaser rates afford initial low cost borrowing
c. balance transfer at below-prime rates
d. credit card debt can create problems if the firm doesnt generate
cash flows to cover credit card payments once low introductory rates
expire

c.

11. In the context of new ventures, what does SBA stand for?
a. Standard Business Arrangement
b. Small Business Association
c. Small Business Administration

a.

12. By an act of Congress, the Small Business Administration (SBA) was

created in which one of the following years?
a. 1953
b. 1968
c. 1973
d. 1985
e. 1993

c.

13. Which is not a duty of the Small Business Administration?

a. provide capital and credit to entrepreneurial start-ups
b. guaranteeing general business loans
c. provide equity financing for start-ups
d. help create new jobs in small businesses
e. help small firms obtain Federal contracts

e.

14. Which of the following is not a Small Business Administration program?

a. loan guaranty programs
b. certified and preferred lender programs
c. low documentation loan programs
d. energy and conservation loan programs

90

Chapter 12: Other Financing Alternatives

e. certified financial planner funding programs

c.

15. Which of the following is not a source of debt funding for a start-up firm?
a. accounts payable
b. vendor financing
c. factoring
d. trade notes
e. leasing

d.

16. Venture banks seek loan returns from:

a. interest received
b. principal repayments
c. warrants being exercised
d. all of the above
e. none of the above

e.

17. Which one of the following is not a current Small Business

Administration (SBA) credit program?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

b.

18. In which of the following credit programs does the SBA approve and
guarantee a not-for-profit Certified Development Companys portion of the
debt?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

a.

19. In which of the following credit programs does the SBA approve a loan
and guarantees up to 85% of loan value?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

c.

20. In which of the following credit programs is the SBA role in the loan one
of providing a direct loan to a community organization, which reloans the
funds in small amounts?
a. 7(a) loan

Chapter 12: Other Financing Alternatives

b.
c.
d.
e.

91

504 loan
microloan
venture capital loan
credit card loan

d.

21. In which of the following credit programs does the SBA borrow money to
be lent Small Business Investment Companies (SBICs) and guarantees
payment to investors?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

a.

22. Commercial banks, credit unions, and/or financial services firms are
lenders in which of the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

b.

23. Commercial banks, jointly with not-for-profit Certified Development

Companies, are lenders in which of the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

c.

24. Not-for-profit or government-affiliated Community Development

Financial Institutions (CDFIs) are lenders in which of the following SBA
credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

d.

25. Small Business Investment Companies (SBICs) are lenders in which of

the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan

92

Chapter 12: Other Financing Alternatives

e. credit card loan

e.

26. Concerning factoring, all of the following are true except:

a. factors prefer business over consumer accounts
b. factoring is done at a discount to the third party purchaser
c. factoring discounts are often a function of the riskiness of the
receivables
d. factoring speeds the inflow of cash to the seller of the receivables
e. receivable lending is the process of factoring

c.

27. The use of receivables as collateral for a loan is known as:

a. capital leasing
b. warehouse financing
c. receivables lending
d. a microloan
e. venture leasing

a.

28. Selling receivables to a third party at a discount from their face value is
referred to as:
a. factoring
b. receivables lending
c. venture banking
d. vendor financing
e. mortgage lending

e.

29. Which of the following is/are not a type of leasing arrangement?

a. factoring
b. capital lease
c. venture lease
d. mortgage lease
e. both a and d

a.

30. Arranging for partial ownership as a component of the expected return to a

lessor is known as:
a. venture leasing
b. capital leasing
c. investment leasing
d. none of the above