Question

1) For the following multiple choice question, select the option that best completes the sentence.

Trade credit is reflected as [blank] on a balance sheet.

Group of answer choices

Accounts receivable

Accounts payable

Notes outstanding

Goodwill

2) What is the primary source of debt capital for existing businesses?

Group of answer choices

Commercial banks

Government programs

Non-financial companies

Brokerage firms

3) In time-sales finance, what do dealers do when they cannot themselves finance installments or conditional sales contracts on a purchased equipment?

They can stall the purchase until they find means for financing.

They sell it off in the market for a lower price.

They take loans to cover their financial purposes.

They sell and assign the installment contract to a bank.

4) Because banks may earn as little as one percent net profit on total assets, they are especially sensitive to the possibility of a [blank]

5) If a loan exceeds the limits of a local bank, part of the loan amount may be offered to [blank] banks to diversify the risk profile.

6) Why do startups have a more difficult time borrowing money than existing business?

Identify the two most likely sources of debt financing for a startup company.

7)

The risk averse nature of commercial lending institutions is consistent with their:

Group of answer choices

Management structure

Expertise

Profit margins

Legal responsibilities to depositors

Answer 1

1) Trade credit is reflected as Accounts payable on a balance sheet.

This is because the accounts payable represents money the company owes for goods it already received. These are trade payables. Trade credit is essentially a short-term indirect loan.

2) The primary source of debt capital for existing businesses is Commercial banks.

This is beacause most enders require a solid business plan, positive track record, and plenty of collateral. These are usually hard to come by for a start- up business. Once the business is underway and profit and loss statements, cash flows budgets, and net worth statements are provided, the company may be able to borrow additional funds.

3) In time-sales finance, dealers can sell and assign the installment contract to a bank when they cannot themselves finance installments or conditional sales contracts on a purchased equipment.

This is because a conditional sales agreement is a financing arrangement where a buyer takes possession of an asset, but its title and right of repossession remain with the seller until the purchase price is paid in full.

4) Because banks may earn as little as one percent net profit on total assets, their balance sheet shows that total assets equal total liabilities plus equity capital.

5) In a bank, an effective credit risk management framework would comprise of the Liability Management Committee and other risk committees of the bank, if any. Banks should price their loans according to the risk profile of the borrower and A Credit-risk Rating Framework (CRF) is necessary to avoid the limitations .

6) Startups have a more difficult time borrowing money than existing business because new businesses don't have business credit of their own, the bank has to look at the credit of the people who own the business. Banks often deny startup loan requests because the personal credit of the borrower has problems. Low credit ratings also affect the ability to obtain startup funding.

The two most likely sources of debt financing for a startup company are:

1. Loans: Loans are the most common and popular mode of debt finance for a company. Businesses borrow money from commercial lenders like banks by keeping some collateral security against the loan. Loans from banks and other commercial lenders are for a fixed period and business needs to pay regular interest for it. The loans can be for short, intermediate or long-term depending upon the financial requirements of the business.
2. Trade credit: It is an arrangement in which the business can purchase the goods now and pay for them later. This way the business can avail debt financing for short term. Trade credit is a good mode of finance for startups as they cannot afford to obtain loans of the higher amount by placing a collateral society.

7) The risk averse nature of commercial lending institutions is consistent with their profit margins

This is because the risk-neutral investor looks only at the potential gains of each investment and ignores the potential downside risk.