Loans Business Loans 1 — Questions and Answers
Question 1: What is the primary purpose of the SBA 7(a) loan program in the United States?
- To provide home mortgages for small business owners
- To offer government-backed loans to small businesses that may not qualify for conventional financing (Correct answer)
- To fund federal government contractors exclusively
- To provide grants that do not require repayment
Correct answer: To offer government-backed loans to small businesses that may not qualify for conventional financing
The SBA 7(a) program guarantees a portion of loans made by approved lenders to small businesses that lack collateral or credit history for conventional loans.
Question 2: What is a business line of credit?
- A lump-sum loan repaid over a fixed term
- A revolving credit facility allowing businesses to borrow up to a set limit as needed (Correct answer)
- A government grant for startup businesses
- A loan that converts to equity if not repaid
Correct answer: A revolving credit facility allowing businesses to borrow up to a set limit as needed
A business line of credit is a revolving facility where the business can draw funds up to a maximum limit, repay them, and draw again as needed.
Question 3: Which financial statement do lenders most closely analyze to assess a business's ability to service debt?
- Balance sheet only
- Owner's personal tax return only
- Cash flow statement and income statement (Correct answer)
- Business insurance policy
Correct answer: Cash flow statement and income statement
Lenders analyze cash flow statements and income statements to determine whether the business generates sufficient revenue to cover debt service obligations.
Question 4: What is a Debt Service Coverage Ratio (DSCR) of 1.25 indicating for a business loan applicant?
- The business has $1.25 in debt for every $1.00 of assets
- The business generates $1.25 in net operating income for every $1.00 of debt service (Correct answer)
- The loan-to-value ratio is 125%
- The business has 25% more debt than equity
Correct answer: The business generates $1.25 in net operating income for every $1.00 of debt service
A DSCR of 1.25 means the business earns $1.25 in net operating income for each $1.00 of required debt payments, indicating a comfortable buffer for repayment.
Question 5: What is invoice financing (accounts receivable financing)?
- A loan secured by business real estate
- A form of short-term borrowing where outstanding invoices are used as collateral (Correct answer)
- A grant program for businesses with unpaid taxes
- A type of equipment lease
Correct answer: A form of short-term borrowing where outstanding invoices are used as collateral
Invoice financing allows businesses to borrow against outstanding accounts receivable, providing immediate cash flow while waiting for customers to pay.
Question 6: Which of the following best describes a merchant cash advance (MCA)?
- A traditional term loan from a bank
- An advance on future credit/debit card sales, repaid through a percentage of daily sales (Correct answer)
- A government-subsidized loan for minority-owned businesses
- A revolving credit line based on business inventory
Correct answer: An advance on future credit/debit card sales, repaid through a percentage of daily sales
An MCA provides a lump sum in exchange for a percentage of the business's future card sales until the advance plus fees is repaid.
Loans Business Loans 1
What is the primary purpose of the SBA 7(a) loan program in the United States?