Chapter 09-Commercial Lending: Name: Clas S: Date
Chapter 09-Commercial Lending: Name: Clas S: Date
Chapter 09-Commercial Lending: Name: Clas S: Date
: s: :
ANSWER: True
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ANSWER: True
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ANSWER: False
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ANSWER: True
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5. Recent history has proven that financial markets can effectively self-regulate.
a. True
ANSWER: False
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6. It is more difficult for lenders to evaluate business loan applications than consumer loan
applications.
a. True
b. False
ANSWER: True
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7. Unlike consumer lending, most commercial lending is regulated only by the terms of the loan
agreement and some state laws.
a. True
b. False
ANSWER: True
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ANSWER: True
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9. The government supports more than a billion dollars in loans each year to American businesses
through the Small Business Administration.
a. True
b. False
ANSWER: True
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10. Charitable organizations are not eligible for SBA loan guaranties.
a. True
b. False
ANSWER: True
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ANSWER: True
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12. Which of the following types of lending accounts for the largest dollar market?
a. commercial lending
b. consumer lending
c. mortgage lending
d. government
lending
ANSWER: a
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13. Which of the following type of business loan is often packaged with a real estate loan?
a. equipment loan
b. construction
loan
ANSWER: b
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14. Equipment loans are often tied to all of the following except
a. the equipment itself.
b. the financial position of the borrower.
c. redevelopment of the business’s real estate.
d. the business’s overall cash flow.
ANSWER: c
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15. Which of the following would a business probably NOT finance by a term loan?
a. real estate
b. equipment
c. increasing
inventory
d. business expansion
ANSWER: c
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ANSWER: b
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17. A form of asset-based lending that advances cash to a business in exchange for its receivables
is called
a. a line of
credit.
b. leasing.
c. a bridge loan.
d. factoring.
ANSWER: d
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ANSWER: a
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ANSWER: c
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ANSWER: b
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ANSWER: c
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24. A business loan that finances working capital would probably be a(n)
____________________ loan.
ANSWER: term
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25. A(n) ____________________ loan is a particular form of short-term loan used to cover
expenses until long-term financing is in place.
ANSWER: bridge
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27. A company’s ____________________ ratio is the total obligations compared to the total
income.
ANSWER: debt
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28. The ____________________ ratio is the principal amount of the loan divided by the value of
the securing property.
ANSWER: loan-to-value
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29. Net ____________________ income is gross income minus expenses, taxes, insurance,
utilities, and so forth.
ANSWER: operating
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30. The Small Business Administration (SBA) ____________________ program is the SBA’s
most popular loan program and the foundation of the agency.
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Name Clas Date
: s: :
31. The SBA’s ____________________ program consists of about 40 for-profit corporations that
raise and distribute venture capital to promising businesses.
ANSWER: Small Business Investment Company
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32. Many banks offer ____________________ loans to meet the inventory financing needs of
small and mid-sized businesses. These types of loans include flexible credit limits to
accommodate seasonal needs.
ANSWER: floorplan
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33. ________________ occurs when people make investments based on anticipated or hoped-for
outcomes, without having an ownership stake in the asset being insured.
ANSWER: Speculation
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34. Products that lack an underlying value in their assets are called
__________________________.
ANSWER: synthetic financial products
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35. The XYZ Company has debt of $500,000 and income of $2.5 million. Find the debt ratio for
the XYZ Company (expressed as a percentage).
ANSWER: 20 percent
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36. Milford Manufacturing Company has a debt ratio of 60 percent. If the company’s debt is
$300,000, find the company’s income.
ANSWER: $500,000
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37. An underwriter has the following data for a company: monthly income: $9,000; monthly debt:
$5,000; loan principal: $40,000; market value: $70,000; gross income: $175,000. Use this data to
find the loan-to-value ratio (expressed as a percentage).
ANSWER: 57 percent
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38. Find the debt service coverage ratio if gross income is $740,000; net operating income is
$444,000; and total cost of debt is $400,000.
ANSWER: 1.11
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39. Assume that gross income is $1.5 million; total cost of debt is $600,000; and the debt service
coverage ratio is 1.5. Find net operating income.
ANSWER: $900,000
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40. How do commercial real estate requirements differ from requirements for private residential
mortgages?
ANSWER: Business facilities often need to be developed or redeveloped, and local
government issues involved (such as zoning ordinances) also may be involved.
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42. List at least five advantages a business gains by leasing rather than purchasing equipment.
ANSWER: Advantages of leasing include the following: low initial cost, fixed rates, longer
terms, smaller payments, tax advantages, equipment obsolescence insurance,
working capital preservation.
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43. What kind of loan-to-value ratio do commercial lenders want to see when considering a
business’s mortgage application?
ANSWER: Commercial lenders want to see a loan-to-value ratio of 80 percent maximum; they
will often not lend more than 60 percent of a commercial property’s appraised
value.
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44. Name at least four financial records or documents a lender will typically examine when a
business applies for a loan, including one that applies to small businesses only.
ANSWER: Lenders will typically examine the following records and documents: federal and
state income tax records, company financial statements, year-to-date profit and
loss and balance statements, projected cash flow estimates, valuations and
appraisals for collateral, written business plan, personal financial statements of
owners. (The final two apply to small businesses only.)
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46. Businesses frequently need loans to help with cash flow problems. Briefly explain the best
time for a business to obtain such a loan.
ANSWER: The best time for a business to obtain the best terms for any loan or credit
arrangement is to anticipate needs rather than waiting until a crisis arises.
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48. Name two factors regarding the building itself that underwriters must assess in order to
determine whether a business construction loan is sound.
ANSWER: Underwriters must assess (1) the worth of the building with its business function
and (2) the building’s potential market value beyond the business.
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49. How do lines of credit work for a business? How are they often used?
ANSWER: When a business establishes a line of credit with a lender, the lender provides cash
to the business to cover routine expenses. Credit lines often finance contract work,
inventory, or receivable intervals. They also may be used for day-to-day expenses.
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50. What is the debt service coverage ratio (DSCR)? What kind of DSCR is desirable—high or
low? Why? What is indicated by a DSCR of less than 1.0?
ANSWER: The debt service coverage ratio compares net operating income to the total cost of
debt. A high DSCR ratio is desirable because the higher the DSCR, the more net
operating income is available for debt service. A DSCR of less than 1.0 indicates a
negative cash flow.
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