Ch 9: Small Business Lending

What is the main purpose of the CAMPARI framework in small business lending?

• To establish legal procedures for loans

• To identify the borrower's risk profile and assess loan terms

• To evaluate tax compliance of small businesses

• To measure profitability of small businesses

Which of the following is a key constraint faced by small businesses in accessing finance?

• Availability of skilled labor

• High demand for their products

• Delays in accounts receivable collection

• Access to international markets

What is one of the unique risks associated with small business lending?

• High technological expenses

• Key-person risk

• Large operational scale

• High-interest rate caps

What type of loan is commonly used for purchasing non-current assets like property or equipment in small business lending?

• Overdrafts

• Fixed Rate Loans

• Bill Finance

• Floating Rate Loans

Which lending approach emphasizes the use of historical financials and relationship development with the borrower?

• Credit Scoring Approach

• Relationship Management Approach

• CAMPARI Framework

• GIGO Principle

In the context of small business lending, what does 'asymmetric information' refer to?

• The lender being better informed about the firm than the borrower

• Equal knowledge shared between lender and borrower

• The borrower being better informed about the firm than the lender

• Both parties lacking necessary information about each other

What is the primary limitation of bill finance for small businesses?

• High-interest rates

• Limited maturity options

• Lack of flexibility

• High risk of default

What is the main disadvantage of the relationship management approach in small business lending?

• It is highly reliant on quantitative data

• It is labor-intensive and requires significant delegation

• It does not account for collateral security

• It excludes soft information from credit decisions

What is the significance of credit scoring models in small business lending in the United States?

• To replace all human decision-making in loan approvals

• To quantify credit risk and reduce costs

• To eliminate the need for financial statements

• To increase dependence on collateral

What does the 'moral hazard' concept in small business finance imply?

• Borrowers take less risk to avoid losing their loans

• Lenders increase interest rates to deter risky projects

• Borrowers pursue high-risk projects due to rising borrowing costs

• Small businesses invest only in ethical projects