Finance for Businesses Quiz

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Questions and Answers

Which type of financing would a trading business most likely rely on for its short-term needs?

Term Loan

Leasing

Overdraft (correct)

Hire Purchase

What type of financing is best suited to fund long-term capital investments?

Short-term bank loans

Suppliers' credit

Equity financing (correct)

Bridging finance

What is true about public limited liability companies that were formerly government organizations?

They operate as commercial enterprises without government backing. (correct)

They continue to receive government guarantees.

They are exempt from the Company Act 1965.

They cannot issue shares to the public.

Which of the following is a characteristic of working capital financing?

It focuses on short-term operational expenses. Signup and view all the answers

Which product is typically used to meet short-term operational asset needs?

Supplier's credit Signup and view all the answers

Why might a lender require shareholders to commit capital before loan financing?

To manage high business risk Signup and view all the answers

Which financing option is specifically designed for the acquisition of fixed assets?

Term Loan Signup and view all the answers

What is the purpose of bridging finance in a construction project?

To bridge the gap between payment receipts and costs Signup and view all the answers

What is the main implication of shareholders' equity being the most expensive source of financing?

It requires higher returns due to risk undertaken by shareholders. Signup and view all the answers

Which of the following best describes the role of trade creditors in financing?

They extend credit terms for short-term goods and services. Signup and view all the answers

What primarily affects the pricing of loans and credit facilities?

The bank's internal credit risk rating system Signup and view all the answers

Which type of financing is most suitable for a company engaged in construction?

Construction and Property Based Financing Signup and view all the answers

How can a Credit Officer enhance income in a competitive banking environment?

By cross-selling wealth management products Signup and view all the answers

In what scenario is a lender particularly concerned with tenor matching?

For long-term asset financing Signup and view all the answers

Which statement about capital-intensive industries is accurate?

They typically have higher capital investment in fixed assets. Signup and view all the answers

What is an example of an ancillary income source for banks?

Spot foreign exchange transactions Signup and view all the answers

What percentage of SMEs face a lack of collateral as a significant constraint in obtaining financing?

55.2% Signup and view all the answers

Which type of business borrower is characterized by a single individual who has complete control over the business?

Sole Proprietorship Signup and view all the answers

In terms of business credit, which legal entity is not classified as a business borrower?

Government Organization Signup and view all the answers

What is the rejection rate for SMEs that have been in operation for more than 10 years?

16% Signup and view all the answers

Which of the following is NOT a type of credit consideration when extending loans?

Interest rate projection Signup and view all the answers

What is the percentage of financing approvals for SMEs that have been in operation for 4-7 years?

13% Signup and view all the answers

Which statement best describes the nature of credit officers' understanding of business borrowers?

They must consider the legal characteristics and borrowing capacity of entities. Signup and view all the answers

Which type of borrower includes entities like clubs and societies?

Other Borrower Signup and view all the answers

Signup and view all the answers

Study Notes

Module 3: Business Credit Analysis

This module covers business credit analysis, particularly for Small and Medium Enterprises (SMEs) in Malaysia.
The module's authors are Jasman Tuyon, PhD; Rapheedah Musneh, PhD; Siti Julea Supar; and Nurziya Muzzawer from the Faculty of Business and Management, Universiti Teknologi MARA, Sabah Branch, Kota Kinabalu Campus.

Chapter Outline

The chapter is divided into sections on SME lending, SME lending application evaluations, and types of business credit.
Topics include: Introduction to SME Lending, Types of Business Credit Borrowers, Types of Business Credit Products and Pricing Strategy, Business Analysis, Credit Request Analysis, Business Plan Analysis, Financial Analysis, General Accounting Principles and Policies, Understanding Financial Statements, Quantitative Aspects of Financial Statements, and Qualitative Aspects of Financial Statements.

Learning Objectives

Students will be able to recognize various legal entities and their borrowing capacity.
Identify diverse business financing needs.
Understand different credit facilities characteristics and pricing.
Perform credit request and business analysis in connection with the 5Cs of credit and the credit report.
Carry out financial analysis.

3.1 Small and Medium Enterprises (SME) Lending

3.1.1 Introduction to SME Lending (includes SME definition; types of bank business lending - Small business, SMEs, Listed Corporation, Type of Firms; and Type of Banks).
3.1.2 SME Definition: criteria for determining SMEs based on sales turnover and full-time employees. Sectors include manufacturing, services, and others; criteria and specifics for each.
3.1.3 SMEs financing situation in Malaysia, with figures on the sector's contribution to GDP, financing share, and financing approval rate.
3.1.1.3 SMEs financing situation: Sources of Financing (includes data from 2005 CENSUS about SMEs, their financing, bank lending, percentages).
3.1.1.3 SMEs financing situation in Malaysia: types of loans and the ratio to each sector (Real Estate, Business Services, Agriculture, Forestry & Fishing, Wholesale, etc).
3.1.1.3 SMEs financing situation: types and purpose of facilities utilized by SMEs in 2005 (including ratios for categories).
3.1.1.3 SMEs financing situation: constraints faced by SMEs in obtaining financing (including ratios).
3.1.1.3 SMEs financing situation: Chart: Share of financing approvals and application by years in operation, and Chart: Financing rejection rate by years in operation (including graphs).

3.1.2 Types of Business Credit Borrowers

There are various types of legal entities, including Sole Proprietorship, Partnership, Limited Liability Partnership (LLP), and Limited Liability Company (LLC).
Each legal entity has unique characteristics and legal capacities for operation and borrowing, therefore requiring different analysis.

Categories of Business Borrowers

3.1.2.a Sole Proprietorship: the owner and business are one entity, so the owner is personally liable for all business debts. Registration with the Companies Commission of Malaysia (CCM) is needed.
3.1.2.b Partnership: a joint business venture, where partners share profits and losses equally and are jointly and severally liable. Registration with CCM is also required.
3.1.2.c Limited Liability Partnership (LLP): this is a hybrid with limited liability protection for its partners. Registration is needed with the Registrar of Limited Liability Partnership.
3.1.2.d Limited Liability Companies (LLC): separate from owners and has limited liability (like a corporation). Shareholders incorporate the company; a minimum of two people are required. Registration with CCM is essential.
Cooperative Societies; Clubs and Societies
Government Organizations.

3.1.3 Types of Business Credit Products and Pricing Strategy

Various types of banking credit financing, including current assets, fixed assets, and cash-basis methods (like Overdraft, Trade Facilities, Non-cash facilities), are available for different financing needs.
Pricing depends on factors such as competition, regulatory costs, funding costs, operational costs, borrower's risk profile (creditworthiness/ratings), and possible losses due to default.

3.2 Evaluation of SME Lending Applications

3.2.1 Business Analysis, 3.2.1.1 credit request analysis, 3.2.1.2 business plan analysis and general financial analysis.

3.1.1.3 SMEs Financing Situation in Malaysia

Includes information on SMEs' share of total formal businesses, contribution to GDP, financing, and approval rate statistics.

3.1.1.3 SME Financing Situation

Includes types of facilities and their financing purposes.

3.1.1.3 SMEs Financing Situation

Provides information about financing sources, their relevance, and relationships.

Identification of Net Working Capital

The calculation of net working capital, including projected stock, debtors, and creditors.

Types of Facilities for Working Capital Financing

Overdraft (OD), Trade facilities, Non-cash facilities.

Key Credit Considerations for Working Capital Financing

How to manage borrower business revenue, expenses, and cash flow to repay short-term borrowings.

Capital Expenditure Financing Needs

How to consider capital investments like factory and plant, depending on the operating cycle.
How to finance capital expenditures.

Types of Facilities for Capital Expenditure Financing Needs

Using methods like Term Loans and Hire Purchase.
Discussion of documentation costs for specific financing plans.
Detailing of tax benefits related to specific asset financing.

Construction and Property-Based Financing

Discusses bridging finance needed for construction and project timelines.
Provides insights into various financing facilities (Revolving construction loan, Non-revolving construction loan, Non-financing facilities).
Discusses key credit considerations and how these apply to developer and contractor financing.

Transactional Financing

Focuses on contract-based financing (sourcing, supplying, manufacturing, and construction). Includes analysis of performance risk, payment risk, and document risk in the financing.

Seasonal Financing

Explores seasonal financing as a solution for businesses facing temporary increased capital needs (in peak sales periods).
The credit considerations of seasonal financing include assumptions in the projection of cash flows for the lender to evaluate the borrower's debt service ability.

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Description

Test your knowledge on different types of financing for trading businesses and capital investments. This quiz covers aspects like working capital, public companies, and the implications of financing sources. Prove your understanding of financial concepts critical for business success.