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?

<p>It focuses on short-term operational expenses. (D)</p> Signup and view all the answers

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

<p>Supplier's credit (C)</p> Signup and view all the answers

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

<p>To manage high business risk (C)</p> Signup and view all the answers

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

<p>Term Loan (B)</p> Signup and view all the answers

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

<p>To bridge the gap between payment receipts and costs (C)</p> Signup and view all the answers

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

<p>It requires higher returns due to risk undertaken by shareholders. (A)</p> Signup and view all the answers

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

<p>They extend credit terms for short-term goods and services. (D)</p> Signup and view all the answers

What primarily affects the pricing of loans and credit facilities?

<p>The bank's internal credit risk rating system (D)</p> Signup and view all the answers

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

<p>Construction and Property Based Financing (C)</p> Signup and view all the answers

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

<p>By cross-selling wealth management products (B)</p> Signup and view all the answers

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

<p>For long-term asset financing (B)</p> Signup and view all the answers

Which statement about capital-intensive industries is accurate?

<p>They typically have higher capital investment in fixed assets. (D)</p> Signup and view all the answers

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

<p>Spot foreign exchange transactions (A)</p> Signup and view all the answers

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

<p>55.2% (C)</p> Signup and view all the answers

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

<p>Sole Proprietorship (D)</p> Signup and view all the answers

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

<p>Government Organization (B)</p> Signup and view all the answers

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

<p>16% (C)</p> Signup and view all the answers

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

<p>Interest rate projection (A)</p> Signup and view all the answers

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

<p>13% (C)</p> Signup and view all the answers

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

<p>They must consider the legal characteristics and borrowing capacity of entities. (C)</p> Signup and view all the answers

Which type of borrower includes entities like clubs and societies?

<p>Other Borrower (A)</p> Signup and view all the answers

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Flashcards

Tenor Matching

Matching the duration of financing with the lifespan of the asset being financed to prevent financial instability.

Bridging Finance

Financial arrangement where a lender provides temporary funding to cover a gap between project payments and expenses.

Loan Pricing

The process of determining the interest rate and fees associated with a loan, taking into account factors like borrower risk, operating costs, and market competition.

Ancillary Income

Income generated from services that are not directly related to core lending activities, such as bill collections, remittances, and foreign exchange transactions.

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Credit Risk Profile

When a lender assesses the likelihood of a borrower defaulting on a loan based on their financial history and ability to repay.

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Shareholder Commitment

The amount of capital shareholders invest in a company before a loan is granted, indicating their commitment and reducing risk for the lender.

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Suppliers' Credit

A loan provided to a business by its suppliers, allowing the business to purchase goods or services on credit and delay payment.

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Transactional Working Capital Financing

Short-term financing designed to address a company's temporary needs for working capital, such as managing inventory or cash flow fluctuations.

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Sovereign Borrowings

When a government borrows money from lenders, it's known as sovereign borrowing. These borrowings are often assessed by local and international rating agencies based on the country's risk profile. A high-risk country might face higher interest rates on its borrowings.

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Government Privatization

The process of transferring government-owned companies to private ownership, making them subject to the Company Act 1965 and no longer reliant on government guarantees.

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Working Capital Financing

Short-term borrowings used to finance the day-to-day operations of a business. This typically involves financing current assets such as raw materials, finished goods, and accounts receivable.

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Capital Expenditure Financing

Financing used to acquire long-term assets, like machinery and buildings. This is often used for capital expenditures and supports long-term growth strategies.

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Construction and Property Based Financing

A type of loan specifically structured for purchasing real estate or funding construction projects, often involving property as collateral.

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Transaction Financing

Financing that supports specific transactions, like mergers and acquisitions, often involving large sums for a specific purpose.

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Seasonal Financing

A type of financing tailored to address seasonal fluctuations in business needs. This might involve borrowing funds during peak season and repaying during slower periods.

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Shareholders' Equity Financing

The owners of a company provide capital, which carries the highest expected return due to the risk associated with the business. This is often considered the most expensive form of financing.

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Loan processing time for SMEs

The time it takes for financial institutions to process a loan request from a small and medium enterprise (SME).

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Lack of financial track record for SMEs

A difficulty faced by SMEs when seeking financing, as they may lack a proven history of financial performance.

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Insufficient loan application documents for SMEs

A constraint faced by SMEs where inadequate supporting documents hinder their loan application process.

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Viable business plan for SMEs

A factor impacting SMEs' loan approval, with financial institutions assessing the viability of a business's projected future earnings.

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Lack of collateral for SMEs

A key challenge for SMEs seeking financing, as they may not possess sufficient assets to secure a loan.

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Legal entities for businesses

The various structures businesses can adopt, such as sole proprietorships, partnerships, and corporations.

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Understanding business borrowing

The study of the regulations and intricacies associated with borrowing for various business entities.

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Assessing credit risk in business entities

A key function of credit officers to assess the potential risks associated with lending to different business entities.

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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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Business Credit Analysis Chapter 3 PDF

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.

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