Exam (elaborations)
Ent Fin Chapter 13
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Exam of 5 pages for the course Ent Fin Chapter 13 at Ent Fin Chapter 13 (Ent Fin Chapter 13)
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ENT FIN CHAPTER 13 QUESTIONS WITHCOMPLETE SOLUTION
b What are the five C's of Credit Analysis? - The five C's of credit analysis are capacity, capital, collateral,
conditions, and character.
Name three of the common loan restrictions and explain their relation to new venturing financing. -
While many different restrictions can be placed on businesses, a few are described here:
(1) Limits on total debt are placed on venture firms to limit the amount of leverage the firm has;
(2) Dividend restrictions are placed on firms to prevent the firm from paying out the newly issued debt in
the form of a dividend;
(3) Maintenance of financial statements may be required to provide the lending institution with a
current representation of the company's financial situation.
Additional loan restrictions - See Figure 13.2 for some additional common loan restrictions including:
(4) restrictions on additional capital expenditures, (5) restrictions on sale of fixed assets, (6) performance
standards on financial ratios, and (7) current tax and insurance payments
What is meant by venture banks? - The term "venture banks" refers to a type of debt investor (lender)
that will consider lending to early stage ventures that do not have proven cash flows.
How do venture banks differ from traditional commercial banks? - They typically offer debt to
accompany venture equity and will look for compensation in both interest payments and equity
positions (including call options) in the venture. Commercial banks typically do not consider this type of
very risky lending.
Why are new ventures at a disadvantage in receiving debt financing? - They are at a disadvantage
because they usually do not have large amounts of assets to provide as collateral, and the risk associated
with the loan is not normally in a risk-averse bank's goals.
Why is credit card financing attractive to entrepreneurs? What are the risks? - It is attractive because it is
quite easy to obtain and also provides interest rates lower than prime for the introductory period, but is
also risky due to high interest rates charged after the teaser period.
, What is the EB-5 immigrant visas program? - The Immigration and Nationality Act (INA) of 1990 provided
an opportunity for foreign nationals to obtain a "green card" through the EB-5 immigrant visas program.
A foreign national may seek Lawful Permanent Resident (LPR) status by investing $1 million in the U.S.
that will preserve or create at least 10 jobs for U.S. workers. The minimum requirement is reduced to
$500,000 if the investment is in a designated rural or high unemployment area.
What is the Small Business Administration (SBA), when was it organized, and what was its purpose? - The
SBA is the Small Business Administration which was created by Congress in 1953 to provide small
businesses help in startup and growth.
Identify and briefly describe four basic SBA credit programs - 1) 7(a) Loan: can be used for most business
purposes including the financing of working capital.
2) 504 Loan: can be used to purchase fixed assets, as well as for other business needs.
3) Microloan: intended for very small businesses with a maximum amount of $35,000 to be used for
general purposes.
4) Venture Capital: this credit program works through Small Business Investment Companies (SBICs)
which are private for-profit investment firms.
Compare the characteristics in terms of loan amounts, lenders, and SBA role in 7(a) loans versus 504
loans. - Refer to Figure 13.3.
7(a) Loan: Lenders include commercial bank, credit union, or financial services firm. Loans are up to $2
million with 7- to 10-year maturities and can be used for most business purposes including the financing
of working capital needs. The SBA role approves loan and guarantees up to 85% of loan value.
504 Loan: Lenders include commercial bank jointly with not-for-profit Certified Development Company.
Loans are up to $4 million for fixed assets and up to $2 million for other business needs. The SBA role
approves and guarantees the development company's portion of debt.
What is a Small Business Investment Company (SBIC)? - SBIC stands for Small Business Investment
Company and is a private financing company which provides capital of diverse types.
What types of advisory services are available from the SBA? - The SBA provides advisory services
(including technical, financial, and contracting) to many small and disadvantaged businesses. They also
provide assistance to exporters and those involved in technology transfer. See section 13.6.
What is a debt guarantee and how does the SBA back a small business loan? - A debt guarantee is an
assurance that a certain portion of the debt principal (and/or interest) will be repaid even in the event of
default. The SBA guarantees part of the loan that a local SBA-participating lender makes through an SBA
program.
In which research areas does the SBA provide supplemental programs? - Refer to Section 13.6. The SBA
provides technical assistance, financial assistance, contracting assistance, disaster assistance recovery,
supports special interests, provides advocacy, laws & regulations assistance, and works to provide civil
rights compliance. Technical assistance is provided for entrepreneurial development, management
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