Chapter 5 — Quiz

Twenty-six self-check questions. Answer from memory first; the key is collapsed at the bottom.

Multiple choice

1. In an SBA 7(a) loan, the money is lent by: - (a) the Small Business Administration - (b) a participating lender, with a partial SBA guaranty - (c) a Certified Development Company - (d) the SBA and a bank, in equal portions

2. In a capital stack, the layer that is repaid last is: - (a) the senior term loan - (b) the equipment lease - (c) the landlord's improvement allowance - (d) owner equity

3. Bellwether's owner injection of \$150,000 against a \$620,000 project is: - (a) 12.1% - (b) 19.4% - (c) 24.2% - (d) 54.0%

4. The SBA guaranty in a 7(a) loan protects: - (a) the borrower, against default - (b) the lender, against the borrower's default - (c) the landlord, against the tenant - (d) the equipment lessor

5. An equipment lessor will generally finance: - (a) hood ductwork - (b) a grease interceptor - (c) a reach-in refrigerator - (d) leasehold improvements

6. The debt service coverage ratio is: - (a) operating profit divided by total sales - (b) cash flow available for debt service divided by total annual debt service - (c) total debt divided by owner equity - (d) interest expense divided by operating profit

7. A tenant-improvement allowance is most commonly: - (a) advanced in cash before construction begins - (b) reimbursed after completion, against invoices and lien waivers - (c) paid directly to your general contractor at closing - (d) a permanent reduction in base rent

8. Bellwether's SBA note amortizes at about \$4,520 a month. Of the roughly \$54,244 paid in year one, the portion that reduces the loan balance is approximately: - (a) \$54,244 - (b) \$34,230 - (c) \$20,014 - (d) none — the first year is interest only

9. Principal repayment on a term loan appears: - (a) as an expense on the profit-and-loss statement - (b) as a reduction in liabilities; it never appears on the P&L - (c) inside cost of goods sold - (d) as occupancy cost

10. A restaurant's equipment lease costs \$15,200 a year on \$60,000 financed; its SBA note costs \$54,300 a year on \$335,000. The lease has a lower stated rate. The reason it costs more per dollar per year is: - (a) lessors charge hidden fees - (b) the lease amortizes over five years rather than ten - (c) the equipment depreciates faster - (d) the lease is unsecured

11. The SBA 504 program is generally a poor fit for a restaurant like Bellwether because: - (a) restaurants are ineligible for SBA programs - (b) it does not fund working capital and is built around owned fixed assets, chiefly real estate - (c) its rates are always higher than 7(a) - (d) it requires no borrower injection

12. A personal guarantee is typically: - (a) limited to the guarantor's ownership percentage - (b) discharged when the business closes - (c) unlimited, unconditional, and joint and several among guarantors - (d) required only for loans above one million dollars

13. The reason a lender's entire analysis focuses on downside scenarios is that: - (a) lenders are unusually pessimistic people - (b) a lender does not share in the upside; its best outcome is being repaid exactly as promised - (c) regulations require worst-case modeling - (d) restaurants fail 90% of the time in year one

14. Which of the following is a negative covenant? - (a) deliver quarterly financial statements - (b) maintain property and liability insurance - (c) do not incur additional debt without the lender's consent - (d) maintain a minimum coverage ratio

15. Bellwether's total annual debt service of \$69,500 against plan revenue of \$1,550,000 is approximately: - (a) 2.1% of sales - (b) 4.5% of sales - (c) 9.0% of sales - (d) 16.8% of sales

16. Taking money from a friend in exchange for a share of the business is: - (a) a private matter with no regulatory dimension - (b) a securities offering, subject to federal and state law - (c) legal only if the amount is under \$100,000 - (d) permitted without documentation if the parties are related

17. Construction lending typically funds: - (a) in a single advance at closing - (b) in draws, against completed work, usually in arrears - (c) directly to the landlord - (d) only after the restaurant has opened

18. In Bellwether's plan, the working-capital reserve, smallwares, and pre-opening costs are funded by: - (a) the SBA loan - (b) the equipment lease - (c) the landlord's TI allowance - (d) the owner injection

Short answer

19. State what each of the four layers in Bellwether's capital stack claims if the business fails.

20. Bellwether projects operating profit before debt service of \$261,020 and total debt service of \$69,500. Compute the DSCR and characterize it.

21. A restaurant projects \$96,000 of operating profit against \$60,000 of debt service. Compute DSCR. If the owners take no salary and a market salary for their roles would be \$70,000, recompute and comment.

22. Explain, in two sentences, why the collateral behind a restaurant loan is so weak — and what fills the gap.

23. Give two reasons a lender requires an owner injection that are not "skin in the game."

24. A vendor offers a "free" \$5,000 piece of equipment in exchange for a \$1.50-per-unit premium on a product you buy 400 units of a year, over four years. What does the equipment cost? Under what conditions would you take the deal anyway?

25. Name three things besides a financial return that an outside investor in a restaurant may believe they are buying, and say why each one is worth writing down before the money moves.

26. Bellwether's \$45,000 reserve is about 1.8 weeks of operating cost on plan. Explain why that is a live question rather than a settled fact, and name the chapter that resolves it.

Answer key — try all twenty-six first **1.** (b) — The SBA does not lend. A participating lender underwrites, funds, and services the loan; the SBA guarantees a portion of the lender's exposure. **2.** (d) — Owner equity is last in line, which is the price of being the one who decides. **3.** (c) — \$150,000 ÷ \$620,000 = 24.2%. **4.** (b) — Nothing in the SBA program protects the borrower. The guaranty exists to make lenders willing to lend into a collateral gap. **5.** (c) — Lessors finance what they could repossess and resell. Ductwork, grease interceptors, and leasehold improvements are affixed to the building. **6.** (b) — Cash flow available for debt service ÷ total annual debt service, principal *and* interest. **7.** (b) — It is a reimbursement, which is why it creates a cash-flow problem during construction: you must fund the work before the money arrives. **8.** (c) — \$20,014 of principal against \$34,230 of interest. After a full year you still owe \$314,986. **9.** (b) — Principal never touches the P&L. That is why a profitable statement and a falling bank balance are entirely compatible. **10.** (b) — Term drives cash; rate drives cost. \$15,200 ÷ \$60,000 = 25.3¢ a year per dollar borrowed, against 16.2¢ on the ten-year note. **11.** (b) — 504 is structured for long-lived owned fixed assets, chiefly owner-occupied real estate, and does not fund working capital. Bellwether leases. **12.** (c) — And it survives the closing of the business; a business bankruptcy does not generally discharge it. **13.** (b) — A lender's best possible outcome is exact repayment. It is correct incentives, not pessimism. **14.** (c) — Affirmative covenants are things you must do; negative covenants are things you must not do without consent; financial covenants are ratios you must maintain. **15.** (b) — \$69,500 ÷ \$1,550,000 = 4.5%, or about \$5,792 a month. **16.** (b) — Regardless of how informal the conversation was or how the parties are related. Use a securities attorney. **17.** (b) — Against completed work, after inspection, against invoices and lien waivers — which is why your contractor is financing your project between draws. **18.** (d) — Lenders and lessors fund what they could sell. Soft costs fall to equity by default, which is why an injection set at the lender's minimum leaves nothing for them. **19.** *Owner injection:* nothing — it is the first money lost. *TI allowance:* the improvements themselves, which are affixed to the landlord's building and stay there. *Equipment lease:* the financed equipment, which the lessor will repossess. *SBA note:* a lien on every business asset, plus the personal guarantee of both owners. **20.** \$261,020 ÷ \$69,500 = **3.76** — strong on its face. On a start-up projection, a ratio that high is a reason to audit the forecast rather than relax, because it is arithmetic performed on numbers that do not yet describe anything. **21.** \$96,000 ÷ \$60,000 = **1.60**. With the owners paid: (\$96,000 − \$70,000) ÷ \$60,000 = \$26,000 ÷ \$60,000 = **0.43** — below 1.00. A coverage ratio computed on a plan where the operators work for nothing describes volunteering, not a business. **22.** Leasehold improvements are affixed to somebody else's building and have essentially no liquidation value, and restaurant equipment sells at auction for a fraction of cost. The gap is filled by the SBA guaranty and, for the remainder, by the owners' personal guarantee. **23.** It absorbs the first loss before any lender money is at risk; and it is one of very few pieces of *demonstrated* rather than *projected* evidence in a first-time borrower's file. **24.** \$1.50 × 400 = \$600 a year × 4 years = **\$2,400** — which is less than the \$5,000 equipment, so the placement is genuinely cheaper than buying, provided the product price is otherwise competitive and you actually use 400 units. Take it if the service is included, if the volume commitment is one you would hit anyway, and if the contract does not auto-renew. **25.** A table and recognition on a busy night; a role or authority in the business; a story to tell. Each one is a promise you did not know you made, and each becomes an operating problem — comped covers, a guest who thinks they can direct staff, an expectation of access — that is trivial to settle in writing beforehand and painful to settle afterward. **26.** Because the reserve is what stands between an ordinary slow month and an emergency, and 1.8 weeks is very little standing. Chapter 1 flagged it, Chapter 5 sized it, and **Chapter 33** builds the thirteen-week cash forecast that answers it.