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1. Commercial lending practices can apply to individuals as well as businesses.

a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

2. Almost no business can exist without financing debt.

a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

3. Short-term loans are always for small amounts of money.

a. True
b. False

ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

4. Contract financing is secured by the value of a specific contract.

a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

5. Recent history has proven that financial markets can effectively self-regulate.
a. True

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b. False

ANSWER: False
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.4.2 - LO:
9.4.2

6. It is more difficult for lenders to evaluate business loan applications than consumer loan
applications.
a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.3 - LO:
9.2.3

8. Manufacturers build items to sell to merchandisers.

a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.3 - LO:
9.1.3

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

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ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.3.1 - LO:
9.3.1

10. Charitable organizations are not eligible for SBA loan guaranties.
a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.3.2 - LO:
9.3.2

11. Merchandisers sell goods or services.

a. True
b. False

ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.3 - LO:
9.1.3

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

13. Which of the following type of business loan is often packaged with a real estate loan?
a. equipment loan
b. construction
loan

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CHAPTER 09—COMMERCIAL LENDING

c. operations loan
d. automobile loan

ANSWER: b
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

16. Most short-term business loans are for

a. six months or
less.
b. one year or less.
c. two years or less.
d. five years or less.

ANSWER: b
POINTS: 1

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LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

18. Debt ÷ Income =

a. debt ratio.
b. debt service coverage
ratio.
c. LTV ratio.
d. income ratio.

ANSWER: a
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

19. A high DSCR indicates that a company has

a. barely any operating income available for debt service.
b. taken on more debt than it has operating income.
c. a good bit of operating income available for debt
service.
d. a negative cash flow.

ANSWER: c
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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20. Which of the following is an approved use of an SBA-backed loan?
a. to pay delinquent taxes
b. to purchase new equipment
c. to pay existing debt
d. to finance floor plan needs

ANSWER: b
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.3.2 - LO:
9.3.2

21. Which of the following is a merchandising business?

a. automobile
factory
b. coal mine
c. ice-cream shop
d. steel mill

ANSWER: c
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.3 - LO:
9.1.3

22. Lending to business enterprises is called ____________________ lending.

ANSWER: commercial
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

23. The greatest start-up cost of new businesses is often ____________________.

ANSWER: equipment
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO:
9.1.1

24. A business loan that finances working capital would probably be a(n)
____________________ loan.
ANSWER: term
POINTS: 1

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LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.2 - LO:
9.1.2

26. The ____________________conducts an annual survey of national banks to determine trends

in lending standards and credit risks as reflected in underwriting practices.
ANSWER: Office of the Comptroller of the Currency (OCC)
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.4 - LO: 9.2.4

27. A company’s ____________________ ratio is the total obligations compared to the total
income.
ANSWER: debt
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

28. The ____________________ ratio is the principal amount of the loan divided by the value of
the securing property.
ANSWER: loan-to-value
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

29. Net ____________________ income is gross income minus expenses, taxes, insurance,
utilities, and so forth.
ANSWER: operating
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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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ANSWER: 7(a) Loan Guaranty
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.3.1 - LO:
9.3.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.3.3 - LO:
9.3.3

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.3 - LO:
9.1.3

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.4.1 - LO:
9.4.1

34. Products that lack an underlying value in their assets are called
__________________________.
ANSWER: synthetic financial products
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.4.1 - LO:
9.4.1

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
POINTS: 1

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LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.2.1 - LO:
9.2.1

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.
POINTS: 1
LEARNING O BNKG.CFFT.3.LO: 9.1.1 - LO: 9.1.1
BJECTIVES:

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41. What is depreciation?

ANSWER: Depreciation is the change in the value of business equipment.
POINTS: 1
LEARNING OBJECTIVES: BNKG.CFFT.3.LO: 9.1.1 - LO: 9.1.1

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.
POINTS: 1
LEARNING O BNKG.CFFT.3.LO: 9.1.2 - LO: 9.1.2
BJECTIVES:

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.
POINTS: 1
LEARNING O BNKG.CFFT.3.LO: 9.2.1 - LO: 9.2.1
BJECTIVES:

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.)
POINTS: 1
LEARNING O BNKG.CFFT.3.LO: 9.2.2 - LO: 9.2.2
BJECTIVES:

45. Briefly explain the SBA Microloan program.

ANSWER: The SBA Microloan program makes funds available to nonprofit intermediary
lenders to help small, newly established businesses.
POINTS: 1
LEARNING OBJ BNKG.CFFT.3.LO: 9.3.3 - LO: 9.3.3
ECTIVES:

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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.
POINTS: 1
LEARNING OB BNKG.CFFT.3.LO: 9.1.3 - LO: 9.1.3
JECTIVES:

47. Describe the investment strategy of a risk preferrer.

ANSWER: In exchange for hoped-for high returns, a risk preferrer is willing to invest in
assets that have a long-term performance that is not predictable.
POINTS: 1
LEARNING OB BNKG.CFFT.3.LO: 9.4.1 - LO: 9.4.1
JECTIVES:

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.
POINTS: 1
LEARNING OB BNKG.CFFT.3.LO: 9.1.1 - LO: 9.1.1
JECTIVES:

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.
POINTS: 1
LEARNING O BNKG.CFFT.3.LO: 9.1.2 - LO: 9.1.2
BJECTIVES:

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.
POINTS: 1
LEARNING O BNKG.CFFT.3.LO: 9.2.1 - LO: 9.2.1
BJECTIVES:

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