(F) Chapter 8: Debt Financing

Question 1

Involves a payback of funds plus a fee for the use of money

Answer 1

Debt Financing

Question 2

Raising capital for a venture by getting a loan.

Answer 2

Debt Financing

Question 3

Two types of Debt Financing

Answer 3

1. Short-term
2. Long-term

Question 4

Type of Debt Financing

One year or less
Often required to obtain working capital
Repaid out of proceeds from sales

Answer 4

Short-term

Question 5

Type of Debt Financing

One to five years or maturing more than five years
Used to finance the purchase of property or equipment, with the purchased asset serving as collateral for the loans

Answer 5

Long-term borrowing

Question 6

Debt Financing Advantage or Disadvantage

No relinquishment of ownership is required.

Answer 6

Advantage

Question 7

Debt Financing Advantage or Disadvantage

More borrowing, potentially, allows for greater return on equity.

Answer 7

Advantage

Question 8

Debt Financing Advantage or Disadvantage

Low interest rates reduce the opportunity cost of borrowing.

Answer 8

Advantage

Question 9

Debt Financing Advantage or Disadvantage

Regular (monthly) interest payments are required

Answer 9

Disadvantage

Question 10

Debt Financing Advantage or Disadvantage

Cash-flow problems can intensify because of payback responsibilities

Answer 10

Disadvantage

Question 11

Debt Financing Advantage or Disadvantage

Heavy use of debt can inhibit growth and development

Answer 11

Disadvantage

Question 12

What are the three Debt Financing Sources?

Answer 12

Commercial Banks
P2P Lending
Other Sources

Question 13

Debt Financing Sources

They make a large number of intermediate term loans with maturities of one to five years

Answer 13

Commercial Banks

Question 14

Debt Financing Sources

In about 90 percent of these cases, these banks require collateral (stocks, machinery, equipment, and real estate, and systematic repayment over the life of the loan required).

Answer 14

Commercial Banks

Question 14

Enumerate/Familiarize the common questions that commercial banks will ask a borrower before lending money

Answer 14

1. What do you plan to do with the money?
2. How much do you need?
3. When will you need it?
4. How long will you need it?
5. How will you repay the loan?

Question 15

Common questions commercial banks will ask a borrower:

Do not plan on using bank loans for high-risk ventures.
Banks lend only to the surest of all possible ventures.

Answer 15

Wht do you plan to do with the money?

Question 16

Common questions banks will ask a borrower

Some go with no clear idea of how much money they need; all they know is they need cash.
The more precisely this question is answered, the more likely the loan will be granted.

Answer 16

How much do you need?

Question 17

Common questions banks will ask a borrower

Never rush a bank with immediate requests for money.
Poor planners never attract lenders.

Answer 17

When do you need it?

Question 18

Common questions banks will ask a borrower

The shorter the period of time entrepreneurs need the money, the more likely they are to get loans.
The time at which the loan will be repaid should correspond to some important milestone in the business plan.

Answer 18

How long will you need it?

Question 19

Common questions banks will ask a borrower

Most important question
What if plans go awry? Can other income be diverted to pay off the loan? Does collateral exist?
The bank may be unimpressed.

Answer 19

How will you repay the loan?

Question 20

P2P Lending is also called what?

Answer 20

Debt-based crowdfunding and/or Social loaning

Question 21

Debt Financing Sources

The practice of lending money to unrelated individuals (peer) without going through a bank or other traditional financial institutions

Answer 21

P2P Lending

Question 22

Debt Financing Sources

Takes place on internet sites that pool money from investors willing to lend money at agreed-upon rates. (e.g., kiva.org)

Answer 22

P2P Lending

Question 23

T of F: Commercial banks charge fees for brokering and servicing loans and collect penalties for late payments as well.

Answer 23

F (P2P Lenders)

Question 24

When did P2P lending first appear?

Answer 24

2005

Question 25

Amounts to be lended in P2P lending

Answer 25

$17,000 to $250,000

Question 26

Interest rates in P2P lending

Answer 26

5.6% to 35.8%

Question 27

Default rates in P2P lending

Answer 27

1.5% to 10%

Question 28

Disadvantages in P2P Lending

Most loans are difficult to complete; so the funding success rate could be questionable

Answer 28

Funding success rate

Question 29

Disadvantages in P2P Lending

The business plan is now released to the public domain

Answer 29

Business plan disclosure

Question 30

Disadvantages in P2P Lending

The entrepreneur does not receive any advice or gain experience from the lender
There are no future rounds of lending or investments

Answer 30

No ongoing counseling relationship

Question 31

Disadvantages in P2P Lending

There are tax implications for the borrower and the lender.

Answer 31

Potential tax liability

Question 32

Disadvantages in P2P Lending

The SEC continues to review these sites for potential regulatory policies

Answer 32

Uncertain regulatory environment

Question 33

What are the other sources of Debt Financing?

Answer 33

Trade Credit
Accounts Receivable Financing
Factoring
Finance Companies

Question 34

Other sources

Credit given by suppliers who sell goods on account

Answer 34

Trade Credit

Question 35

Other sources

Reflected on the entrepreneur’s balance sheet as accounts payable

Answer 35

Trade Credit

Question 36

Other sources

Many small, new businesses obtain this credit when no other form of financing is available to them.
Suppliers offer this to attract new customers.

Answer 36

Trade Credit

Question 37

Other sources

Short-term financing that involves either (1) the pledge of receivables as collateral for a loan, or (2) the sale of receivables.

Answer 37

Accounts Receivable Financing

Question 38

The two plans which banks may make receivable loans on

Answer 38

Notification and Nonnotification

Question 39

Accounts Receivable Plan

purchasers of goods are informed that their accounts have been assigned to the bank; then they make payments directly to the bank, which then credits them to the borrower’s account

Answer 39

Notification

Question 40

Accounts Receivanle Plan

borrowers collect their accounts as usual and then pay off the bank loan.

Answer 40

Nonnotification Plan

Question 41

Other sources

The sale of accounts receivable.
Under this, the receivables are sold at a discounted value to a factoring company;
Under the standard arrangement, the factor will buy the client’s receivables outright, without recourse, as soon as the client creates them by its shipment of goods to customers

Answer 41

Factoring

Question 42

Other sources

Common in textiles, furniture manufacturing, clothing manufacturing, toys, shoes, and plastics.

Answer 42

Factoring

Question 43

Other sources

Asset-based lenders that lend money against assets such as receivables, inventory, and equipment

Answer 43

Finance Companies