Loans Business Loans 3

Question 1

Which of the following is a key advantage of a term loan over a business line of credit?

Accepted Answer

Term loans provide a lump sum with predictable fixed payments, suitable for large investments

Answer

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?

Accepted Answer

Character, Capacity, Capital, Collateral, Conditions

Answer

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?

Accepted Answer

A security interest covering all of a business's current and future assets

Answer

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?

Accepted Answer

As a compensating balance requirement to offset lending risk and maintain the banking relationship

Answer

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?

Accepted Answer

A factor rate is a fixed multiplier applied to the advance amount, not an annual percentage rate

Answer

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.

Loans Practice Test

Loans Practice Test

Loans Business Loans 3