Loans Business Loans 3 — Questions and Answers
Question 1: Which of the following is a key advantage of a term loan over a business line of credit?
- Term loans offer unlimited revolving access to funds
- Term loans provide a lump sum with predictable fixed payments, suitable for large investments (Correct answer)
- Term loans never require collateral
- Term loans can only be used for inventory purchases
Correct answer: Term loans provide a lump sum with predictable fixed payments, suitable for large investments
Term loans provide a specific lump sum with a fixed repayment schedule, making them ideal for planned, one-time capital expenditures.
Question 2: What does the 'Five Cs of Credit' framework evaluate when underwriting a business loan?
- Cost, Collateral, Capacity, Capital, Credibility
- Character, Capacity, Capital, Collateral, Conditions (Correct answer)
- Cash, Credit, Customers, Collateral, Compliance
- Competency, Cash flow, Credit, Collateral, Conditions
Correct answer: Character, Capacity, Capital, Collateral, Conditions
The Five Cs — Character, Capacity, Capital, Collateral, and Conditions — are the core criteria lenders use to evaluate a business loan applicant's creditworthiness.
Question 3: What is a blanket lien, often required by business lenders?
- A lien placed only on the owner's home
- A security interest covering all of a business's current and future assets (Correct answer)
- A lien on a single specific piece of equipment
- A cross-collateralization agreement between two lenders
Correct answer: A security interest covering all of a business's current and future assets
A blanket lien gives the lender a security interest in all of the borrower's business assets — including inventory, equipment, and receivables — as collateral.
Question 4: Why might a lender require a business to maintain a specific minimum balance in a deposit account as a loan condition?
- To earn interest income from the business
- As a compensating balance requirement to offset lending risk and maintain the banking relationship (Correct answer)
- To process payroll for the business automatically
- To avoid triggering state usury laws
Correct answer: As a compensating balance requirement to offset lending risk and maintain the banking relationship
A compensating balance requirement means the business must keep a minimum deposit with the lender, effectively reducing the net loan amount and ensuring cash availability.
Question 5: How does the factor rate used in a merchant cash advance differ from a traditional interest rate?
- A factor rate is always lower than a traditional interest rate
- A factor rate is a fixed multiplier applied to the advance amount, not an annual percentage rate (Correct answer)
- Factor rates are regulated by the Truth in Lending Act
- A factor rate decreases as more of the advance is repaid
Correct answer: A factor rate is a fixed multiplier applied to the advance amount, not an annual percentage rate
A factor rate (e.g., 1.35) multiplies the advance amount to determine total repayment and does not decrease as the balance is paid, unlike amortizing interest.
Question 6: Under the Community Reinvestment Act (CRA), what are US banks required to do?
- Offer below-market rates to all small businesses
- Meet the credit needs of the communities in which they operate, including low- and moderate-income areas (Correct answer)
- Provide free checking accounts to all businesses
- Lend exclusively to minority-owned businesses
Correct answer: Meet the credit needs of the communities in which they operate, including low- and moderate-income areas
The CRA requires FDIC-insured banks to actively lend, invest, and provide services in all communities they serve, including low- and moderate-income areas.
Loans Business Loans 3
Which of the following is a key advantage of a term loan over a business line of credit?