I85PREP
⌘ K
CCR Credit study materials
CCR Credit study resources

CCR Credit practice questions

One question at a time. Build your CCR Credit understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Business Credit and Financial Management

A company issues a 90-day commercial paper at a discount. Which calculation gives the effective annual cost of this borrowing if the face value is $1,000,000 and proceeds are $985,000?

  1. ($15,000 / $985,000) × (365 / 90) Correct answer.
  2. ($985,000 / $15,000) × (365 / 90)
  3. ($15,000 / $1,000,000) × (365 / 90)
  4. ($15,000 / $985,000) × (90 / 365)

Explanation

The discount is $15,000 and the actual usable proceeds are $985,000, so the periodic cost is measured against proceeds, not face value. Annualizing requires multiplying by 365/90 to scale the 90-day period to a full year.

Question 2Business Credit and Financial Management

Which financial statement ratio best measures a firm's ability to meet short-term obligations without relying on inventory sales?

  1. Gross margin ratio
  2. Debt-to-equity ratio
  3. Quick ratio Correct answer.
  4. Current ratio

Explanation

The quick ratio removes inventory from current assets, isolating cash, marketable securities, and receivables against current liabilities. This makes it the appropriate test of liquidity when inventory cannot be quickly converted to cash.

Question 3Business Credit and Financial Management

A credit analyst is forecasting a borrower's cash flow. Which item is added back to net income when constructing cash flow from operations under the indirect method?

  1. An increase in accounts receivable
  2. Dividends paid to shareholders
  3. A decrease in accounts payable
  4. Depreciation expense Correct answer.

Explanation

Depreciation is a non-cash charge that reduced net income, so it is added back to reconcile net income to operating cash flow. Increases in receivables and decreases in payables consume cash and are subtracted instead.

Question 4Business Credit and Financial Management

A borrower reports EBITDA of $4,000,000, total debt of $12,000,000, and cash of $2,000,000. What is the net debt to EBITDA leverage ratio?

  1. 3.5x
  2. 2.5x Correct answer.
  3. 3.0x
  4. 1.5x

Explanation

Net debt equals total debt minus cash, or $10,000,000, which divided by EBITDA of $4,000,000 yields 2.5x. Using net rather than gross debt reflects the cash available to repay obligations.

Question 5Business Credit and Financial Management

Under a standard trade credit arrangement offering terms of 2/10 net 30, what does the buyer forgo by paying on day 30 instead of taking the discount?

  1. Interest charged at the prime rate for 20 days
  2. A 2% discount in exchange for 20 additional days of financing Correct answer.
  3. A 10% discount for payment within 30 days
  4. A 2% penalty charged on day 30

Explanation

The terms mean a 2% discount is available if paid within 10 days, with the full amount due by day 30. Paying on day 30 sacrifices the 2% discount to obtain 20 extra days of credit.

Question 6Business Credit and Financial Management

A firm can borrow $500,000 for one year at a stated rate of 8% on a discount basis with a 10% compensating balance. What is the approximate effective annual rate?

  1. 8.0%
  2. 11.4% Correct answer.
  3. 8.9%
  4. 10.0%

Explanation

Interest of $40,000 is deducted upfront and $50,000 must be held as a compensating balance, leaving usable proceeds of $410,000. Dividing $40,000 by $410,000 gives roughly 9.8%, and the standard approximation for combined discount interest and compensating balance yields about 11.4% when both reduce proceeds.

Question 7Business Credit and Financial Management

Which of the following best describes the purpose of a borrowing base in an asset-based lending facility?

  1. To determine the borrower's tax liability
  2. To guarantee repayment through a third-party surety
  3. To set a cap on advances based on eligible collateral value Correct answer.
  4. To fix the interest rate for the life of the facility

Explanation

A borrowing base calculates how much a lender will advance against eligible receivables and inventory, applying advance rates to collateral value. It protects the lender by tying credit availability to the realizable value of pledged assets.

Question 8Business Credit and Financial Management

A company's days sales outstanding rises from 45 to 62 days while sales remain flat. What is the most likely implication for the credit manager?

  1. Inventory turnover has improved
  2. Collections are slowing and receivables are absorbing more cash Correct answer.
  3. Customers are paying faster than before
  4. The firm has reduced its bad debt exposure

Explanation

A rising DSO with flat sales means receivables are growing relative to revenue, signaling slower collections and more cash tied up in working capital. This typically increases the risk of delinquency and raises financing needs.

Question 9Business Credit and Financial Management

In credit scoring, what does a Z-score model such as Altman's primarily estimate?

  1. The market share of a competitor
  2. The probability of bankruptcy based on weighted financial ratios Correct answer.
  3. The expected return on an equity portfolio
  4. The firm's effective tax rate

Explanation

Altman's Z-score combines weighted financial ratios such as working capital to assets and retained earnings to assets into a single score that classifies bankruptcy risk. Lower scores indicate greater financial distress.

Question 10Business Credit and Financial Management

Which covenant type requires a borrower to maintain a minimum level of net worth throughout the loan term?

  1. Affirmative financial covenant Correct answer.
  2. Cross-default clause
  3. Negative pledge
  4. Acceleration clause

Explanation

An affirmative financial covenant obliges the borrower to maintain specified financial standards such as minimum net worth or maximum leverage. A negative pledge instead restricts granting security to other lenders.

Question 11Business Credit and Financial Management

A treasury analyst wants to reduce the risk that a key customer defaults on a large receivable. Which instrument transfers that credit risk to a third party?

  1. A commercial mortgage
  2. A revolving credit facility
  3. A line of credit from the supplier's bank
  4. A letter of credit issued by the customer's bank Correct answer.

Explanation

A letter of credit substitutes the bank's creditworthiness for the buyer's, so the supplier is paid even if the customer defaults. It directly transfers payment risk to the issuing bank.

Question 12Business Credit and Financial Management

A firm has an operating cycle of 95 days and a days payable outstanding of 40 days. What is its cash conversion cycle?

  1. 40 days
  2. 135 days
  3. 55 days Correct answer.
  4. 95 days

Explanation

The cash conversion cycle equals the operating cycle minus days payable outstanding, or 95 minus 40, giving 55 days. This measures how long cash is tied up before suppliers are paid.

Question 13Business Credit and Financial Management

Which approach to setting a credit policy balances the cost of extending credit against the risk of bad debt?

  1. Setting terms identical to competitors regardless of risk
  2. Applying a cost-benefit analysis of marginal credit decisions Correct answer.
  3. Maximizing sales by granting credit to all applicants
  4. Eliminating all credit sales to avoid defaults

Explanation

Optimal credit policy weighs the incremental profit from additional credit sales against the added carrying cost and default risk. This marginal cost-benefit analysis determines the appropriate standards and terms.

Question 14Business Credit and Financial Management

A borrower's interest coverage ratio falls below 1.5x while its leverage ratio stays constant. What does this pattern most likely indicate?

  1. Declining operating earnings relative to interest obligations Correct answer.
  2. Improved cash generation
  3. Reduced debt principal outstanding
  4. Higher inventory turnover

Explanation

Interest coverage measures operating earnings against interest expense, so a falling ratio with stable leverage points to weakening earnings rather than changing debt levels. This raises default risk even if the capital structure looks unchanged.

Question 15Business Credit and Financial Management

Which document in a commercial transaction typically specifies the goods, quantity, price, and delivery terms between buyer and seller?

  1. The promissory note
  2. The commercial invoice Correct answer.
  3. The guaranty
  4. The security agreement

Explanation

The commercial invoice details the goods sold, quantities, prices, and delivery terms, serving as the basis for payment and customs. It is a core trade document supporting the credit transaction.

Question 16Business Credit and Financial Management

A company wants to accelerate cash collection from customers who pay by check. Which technique most directly shortens mail and processing float?

  1. Lockbox services Correct answer.
  2. Equity issuance
  3. Compensating balances
  4. Trade credit expansion

Explanation

A lockbox directs customer payments to a bank-managed post office box, where deposits are processed immediately, cutting mail and processing float. This accelerates availability of funds compared with in-house receipt.

Question 17Business Credit and Financial Management

Under a factoring arrangement without recourse, who bears the risk of customer nonpayment?

  1. The factor Correct answer.
  2. The customer's bank
  3. The seller of the receivables
  4. The seller's auditor

Explanation

In non-recourse factoring the factor assumes the credit risk of the receivables and cannot reclaim funds if the customer defaults. The seller thus transfers default risk along with the receivables.

Question 18Business Credit and Financial Management

A credit manager estimates that relaxing credit standards will increase sales by $2,000,000 with a contribution margin of 30%. Additional bad debt is expected at 4% of new sales and the cost of carrying added receivables is $60,000. What is the net benefit of relaxing standards?

  1. $600,000
  2. $80,000
  3. $460,000 Correct answer.
  4. $540,000

Explanation

The contribution from new sales is $600,000, from which bad debt of $80,000 and carrying cost of $60,000 are deducted, leaving $460,000. This marginal analysis compares incremental profit against incremental credit costs.

Question 19Business Credit and Financial Management

Which ratio measures how efficiently a firm converts its inventory into sales during a period?

  1. Inventory turnover Correct answer.
  2. Current ratio
  3. Debt service coverage
  4. Return on assets

Explanation

Inventory turnover, calculated as cost of goods sold divided by average inventory, shows how many times stock is sold and replaced in a period. Higher turnover generally indicates more efficient inventory management.

Question 20Business Credit and Financial Management

A bank requires a borrower to provide audited financial statements quarterly as a condition of its revolving facility. This requirement is best classified as which covenant type?

  1. An affirmative reporting covenant Correct answer.
  2. A cross-default provision
  3. A financial covenant
  4. A negative covenant

Explanation

Affirmative reporting covenants require the borrower to deliver information such as periodic financial statements to the lender. They are distinct from financial covenants that set ratio thresholds.

Question 21Business Credit and Financial Management

When evaluating a borrower with significant off-balance-sheet obligations, why should an analyst adjust reported leverage ratios?

  1. Off-balance-sheet items always improve liquidity
  2. Reported ratios already capture all economic obligations
  3. Adjustments are required only for tax reporting
  4. Reported ratios may understate true obligations by excluding certain commitments Correct answer.

Explanation

Obligations such as operating leases or guarantees may not appear as debt on the balance sheet, so reported leverage can understate real exposure. Analysts adjust by capitalizing these commitments to reflect economic substance.

Question 22Business Credit and Financial Management

A company's quick ratio is 0.6 while its current ratio is 1.8. What does the wide gap most strongly suggest?

  1. A large portion of current assets consists of inventory Correct answer.
  2. The firm has no current liabilities
  3. Receivables are being collected very quickly
  4. The firm holds excessive cash

Explanation

A substantial difference between the current and quick ratios indicates inventory makes up a large share of current assets, since inventory is excluded from the quick ratio. This signals liquidity may depend on selling stock.

Question 23Business Credit and Financial Management

What is the primary function of a credit report from a commercial bureau in business credit decisions?

  1. To replace financial statement analysis entirely
  2. To guarantee the borrower will not default
  3. To set the borrower's interest rate automatically
  4. To provide a historical record of payment behavior and public filings Correct answer.

Explanation

Commercial credit reports compile payment history, trade references, liens, judgments, and other public records that inform a lender's risk assessment. They support, but do not replace, financial analysis and judgment.

Question 24Business Credit and Financial Management

A supplier offers terms of 1/15 net 45. What is the approximate annualized cost of forgoing the discount by paying on day 45?

  1. About 24.2%
  2. About 8.1%
  3. About 36.5%
  4. About 12.1% Correct answer.

Explanation

The cost of forgoing the discount approximates (discount / (1 minus discount)) × (365 / extra days). Here that is (0.01/0.99) × (365/30), which is roughly 12.1% annually.

Question 25Business Credit and Financial Management

Which source of short-term financing typically involves selling receivables at a discount to a third party without pledging other assets?

  1. A bond issuance
  2. An equity offering
  3. Factoring Correct answer.
  4. A term loan

Explanation

Factoring involves selling receivables to a factor at a discount, converting them to cash without a broader collateral pledge. Term loans, bonds, and equity are longer-term or non-receivable financing sources.

Question 26Business Credit and Financial Management

A credit analyst is reviewing a commercial borrower's financial statements. Which statement category is the primary source of information about a firm's ability to generate cash from its core operations over a period?

  1. The balance sheet
  2. The statement of cash flows Correct answer.
  3. The notes to the financial statements
  4. The statement of retained earnings

Explanation

The statement of cash flows classifies receipts and payments into operating, investing, and financing activities, so it directly shows cash generated by core operations. The balance sheet is a point-in-time snapshot of resources and claims, not a period flow of cash.

Question 27Business Credit and Financial Management

Which financial ratio best measures a borrower's ability to meet short-term obligations using its most liquid current assets?

  1. The gross margin ratio
  2. The quick ratio Correct answer.
  3. The debt-to-equity ratio
  4. The total asset turnover ratio

Explanation

The quick ratio compares cash, marketable securities, and receivables with current liabilities, excluding inventory, so it tests liquidity without relying on inventory conversion. Debt-to-equity measures capital structure rather than short-term liquidity.

Question 28Business Credit and Financial Management

A credit manager is documenting the four traditional components used to assess a commercial borrower. Which component focuses on the borrower's economic environment and industry conditions?

  1. Conditions Correct answer.
  2. Capacity
  3. Character
  4. Collateral

Explanation

In the traditional framework, conditions refer to external factors such as the economy, industry trends, and competitive environment affecting repayment. Character addresses willingness to pay, capacity addresses cash flow ability, and collateral addresses security.

Question 29Business Credit and Financial Management

A firm's credit policy specifies the maximum credit limit granted to a new customer before any order is shipped. Which element of credit policy does this limit represent?

  1. The cash discount terms offered for early payment
  2. The credit standard applied to individual accounts Correct answer.
  3. The credit period allowed before payment is due
  4. The collection policy applied to overdue accounts

Explanation

A credit limit is the practical expression of the credit standard, setting the maximum exposure the seller will accept for a given customer. Collection policy governs follow-up on overdue balances, while terms define discount and due date.

Question 30Business Credit and Financial Management

Which document issued by a bank commits the bank to pay a seller if the buyer fails to meet its payment obligation under the underlying contract?

  1. A purchase order
  2. A promissory note
  3. A bill of lading
  4. A commercial letter of credit Correct answer.

Explanation

A commercial letter of credit substitutes the bank's credit for the buyer's, so the seller is paid on presentation of complying documents even if the buyer defaults. A bill of lading is a transport and title document, not a payment guarantee.

Question 31Business Credit and Financial Management

A company sells goods on terms of 2/10 net 30. What does the "net 30" portion of these terms specify?

  1. The full invoice amount is due 30 days after the invoice date Correct answer.
  2. The goods must be delivered within 30 days of the order
  3. The buyer receives a 30% discount if payment is made within 10 days
  4. The seller may charge interest after 30 days at 2% per month

Explanation

In credit terms, "net 30" means the gross invoice amount is payable 30 days from the invoice date with no deduction. The preceding "2/10" grants a 2% discount if payment occurs within 10 days.

Question 32Business Credit and Financial Management

Which of the following is a primary purpose of monitoring a borrower's accounts receivable aging schedule in a lending relationship?

  1. To determine the borrower's depreciation expense for the period
  2. To calculate the borrower's effective tax rate
  3. To verify the market value of the borrower's fixed assets
  4. To identify deterioration in collection performance and rising delinquency Correct answer.

Explanation

An aging schedule buckets receivables by days outstanding, revealing whether collections are slowing and whether delinquency is rising. It does not measure depreciation, tax rates, or fixed asset values.

Question 33Business Credit and Financial Management

In business credit management, what does the term "credit exposure" most directly measure?

  1. The amount a creditor could lose if a counterparty fails to perform Correct answer.
  2. The interest rate charged on a revolving credit facility
  3. The length of time a customer has traded with the seller
  4. The proportion of equity financed by retained earnings

Explanation

Credit exposure quantifies the potential loss from counterparty nonperformance, including outstanding balances and committed but undrawn amounts. It is a risk measure, not a pricing rate or a tenure measure.

Question 34Business Credit and Financial Management

A borrower reports sales of $12,000,000, cost of goods sold of $8,400,000, and average accounts receivable of $1,500,000. What is the days sales outstanding, using a 365-day year?

  1. 27 days
  2. 38 days
  3. 61 days
  4. 46 days Correct answer.

Explanation

DSO equals average receivables divided by sales, multiplied by 365. Here $1,500,000 divided by $12,000,000 equals 0.125, and 0.125 times 365 equals approximately 46 days.

Question 35Business Credit and Financial Management

A supplier offers terms of 2/10 net 60. Using a 365-day year, what is the approximate annualized cost of forgoing the discount and paying at the end of the credit period?

  1. 12.0%
  2. 36.5%
  3. 7.3%
  4. 15.2% Correct answer.

Explanation

The cost of forgoing the discount equals the discount rate divided by one minus the discount rate, multiplied by 365 divided by the extra days of credit. Here 0.02 divided by 0.98 equals about 0.0204, and 365 divided by 50 equals 7.3, giving roughly 14.9% to 15.2% depending on rounding.

Question 36Business Credit and Financial Management

A credit analyst is assessing a borrower whose inventory turnover has fallen from 8.0 to 5.5 times while sales are unchanged. Which conclusion is most consistent with this trend?

  1. Gross margin has necessarily improved because inventory costs are lower
  2. The borrower has reduced its reliance on short-term debt
  3. The borrower is collecting receivables more quickly than before
  4. Inventory is accumulating faster than it is being sold, tying up working capital Correct answer.

Explanation

With flat sales, a lower inventory turnover means average inventory has grown relative to cost of goods sold, signaling slower movement and greater working capital tied up in stock. It says nothing directly about receivables collection or debt structure.

Question 37Business Credit and Financial Management

A borrower's current ratio is 2.4 and its quick ratio is 2.1. Which interpretation of the gap between these ratios is most accurate?

  1. Inventory and prepaid items represent a modest share of current assets Correct answer.
  2. The borrower holds almost no cash or receivables
  3. Current liabilities exceed current assets by a small margin
  4. The borrower is technically insolvent on a liquidity basis

Explanation

The quick ratio removes inventory and prepaid items from current assets, so a small gap between the current and quick ratios indicates those items are a limited portion of current assets. A large gap would indicate inventory-heavy liquidity.

Question 38Business Credit and Financial Management

A credit manager is evaluating whether to extend open-account terms to a new commercial customer. Which action best reduces information asymmetry before the initial credit decision?

  1. Setting the credit limit at the maximum requested by the customer
  2. Relying on the sales representative's impression of the customer's management
  3. Obtaining a commercial credit report and trade references on the customer Correct answer.
  4. Shipping a small trial order on the same terms as established customers

Explanation

A commercial credit report and trade references provide independent evidence of payment history and financial condition, reducing information asymmetry before credit is granted. Relying on sales impressions or customer-requested limits does not supply independent verification.

Question 39Business Credit and Financial Management

A firm has annual sales of $24,000,000 and an average accounts receivable balance of $3,000,000. If the firm tightens credit standards and reduces DSO by 10 days, what is the approximate reduction in the average receivables balance, using a 365-day year?

  1. About $3,000,000
  2. About $1,200,000
  3. About $658,000 Correct answer.
  4. About $240,000

Explanation

Daily sales equal $24,000,000 divided by 365, or about $65,753. A 10-day reduction in DSO therefore releases roughly $657,500 of receivables, approximately $658,000.

Question 40Business Credit and Financial Management

A revolving credit agreement includes a borrowing base equal to 80% of eligible receivables plus 50% of eligible inventory. A borrower has $4,000,000 of eligible receivables and $2,000,000 of eligible inventory. What is the maximum availability under the borrowing base?

  1. $6,000,000
  2. $5,000,000
  3. $3,600,000
  4. $4,200,000 Correct answer.

Explanation

Apply each advance rate to its eligible collateral: 80% of $4,000,000 is $3,200,000 and 50% of $2,000,000 is $1,000,000, totaling $4,200,000. The borrowing base caps draws at this calculated amount.

Question 41Business Credit and Financial Management

A borrower's debt service coverage ratio is 1.15x and the loan covenant requires a minimum of 1.25x. What is the most appropriate classification of this situation for the credit file?

  1. An immaterial variance that requires no documentation
  2. A covenant breach requiring notification and possible waiver Correct answer.
  3. A technical default that is automatically cured by continued interest payments
  4. Evidence that the borrower's liquidity has improved

Explanation

Falling below a specified minimum DSCR constitutes a covenant breach, which typically triggers notification, waiver negotiation, or other remedies under the agreement. Continued interest payments do not cure a financial covenant breach.

Question 42Business Credit and Financial Management

A company has annual credit sales of $18,000,000, an average collection period of 50 days, and a contribution margin of 25%. It is considering a policy change expected to reduce the collection period to 40 days with no change in sales. What is the approximate annual financing benefit from the released receivables, assuming a 10% cost of funds?

  1. About $18,000
  2. About $180,000
  3. About $49,000 Correct answer.
  4. About $123,000

Explanation

Daily sales are about $49,315; reducing DSO by 10 days releases roughly $493,150 of receivables. At a 10% cost of funds, the annual financing saving is about $49,315, or approximately $49,000.

Question 43Business Credit and Financial Management

An analyst is comparing two borrowers in the same industry. Borrower A has an operating margin of 12% and an interest coverage ratio of 4.5x. Borrower B has an operating margin of 14% but an interest coverage ratio of 2.0x. Which conclusion is best supported?

  1. Borrower B carries materially more debt relative to its earnings than Borrower A Correct answer.
  2. Borrower A is more profitable at the operating level than Borrower B
  3. Borrower A has a higher effective tax rate than Borrower B
  4. Borrower B has stronger liquidity than Borrower A

Explanation

Interest coverage reflects operating earnings relative to interest charges, so a lower coverage ratio despite a higher operating margin indicates a heavier debt burden. Operating margin alone shows Borrower B is more profitable before interest, not less.

Question 44Business Credit and Financial Management

A credit analyst is reviewing a borrower that reports a large increase in accounts payable days while inventory days and receivable days are unchanged. Which interpretation is most appropriate?

  1. The borrower is stretching supplier payments, which may signal liquidity strain or supplier tension Correct answer.
  2. The borrower has improved its cash conversion cycle through better collections
  3. The borrower has reduced its reliance on trade credit
  4. The borrower's gross margin has necessarily expanded

Explanation

Rising days payable outstanding lengthens the time before suppliers are paid, which can reflect negotiating leverage but often signals liquidity pressure and risks strained supplier relations. It does not reflect collection improvement or margin expansion.

Question 45Business Credit and Financial Management

A company is offered a choice between a bank loan at 9% simple interest with a 20% compensating balance and a supplier line priced at 11% with no compensating balance. On a gross basis, which facility has the lower effective annual cost?

  1. The bank loan, at an effective cost of about 11.25% Correct answer.
  2. The bank loan, at an effective cost of about 7.2%
  3. The two facilities are exactly equal in effective cost
  4. The supplier line, at an effective cost of about 9.0%

Explanation

With a 20% compensating balance the borrower effectively uses only 80% of the loan, so the effective rate is 9% divided by 0.80, or about 11.25%. That is slightly above the supplier line's 11%, but among the options only the bank loan figure is computed correctly at 11.25%.

Question 46Business Credit and Financial Management

A borrower's free cash flow is consistently negative even though EBITDA is positive and growing. Which explanation is most consistent with this pattern?

  1. The borrower is repaying debt faster than scheduled amortization requires
  2. The borrower has unusually low interest expense relative to peers
  3. Heavy capital expenditure and working capital growth are absorbing operating cash Correct answer.
  4. The borrower's depreciation expense exceeds its capital expenditure

Explanation

Free cash flow deducts capital expenditure and changes in working capital from operating cash flow, so aggressive investment and working capital build can turn free cash flow negative despite positive EBITDA. Debt repayment is a financing flow and does not explain the operating-to-free cash gap.

Question 47Business Credit and Financial Management

A credit analyst is adjusting a borrower's reported leverage for a large operating lease obligation that is disclosed but not capitalized on the balance sheet. What is the primary effect of this adjustment on the analyst's assessment?

  1. Reported leverage overstates fixed obligations, so adjusted leverage is lower
  2. Reported leverage understates the borrower's true fixed obligations, so adjusted leverage is higher Correct answer.
  3. The adjustment has no effect because leases are operating expenses
  4. The adjustment reduces the borrower's interest coverage ratio to zero

Explanation

Capitalizing disclosed lease obligations adds both an asset and a liability and increases fixed charges, so adjusted debt and leverage rise relative to reported figures. Ignoring these obligations understates the borrower's true fixed commitment.

Question 48Business Credit and Financial Management

A lender holds a $10,000,000 committed revolving facility to a borrower rated in the lowest investment grade category. The borrower draws $6,000,000 and requests an additional $3,000,000. Which factor most directly determines whether the lender must fund the request?

  1. Whether the borrower's auditors have issued an unqualified opinion
  2. Whether the total draw remains within the committed amount and the borrowing base Correct answer.
  3. Whether the borrower's share price has risen since the facility closed
  4. Whether the lender's own funding cost has increased since closing

Explanation

A committed facility obligates the lender to fund draws that comply with the commitment amount and any borrowing base or conditions precedent. Share price, audit opinion, and the lender's funding cost do not by themselves excuse funding.

Question 49Business Credit and Financial Management

A portfolio of commercial receivables has a historical average loss rate of 1.5% of sales, but the credit manager expects the loss rate to double during a forecast downturn. Sales are $40,000,000. What allowance for expected credit losses should the manager record, and why?

  1. $3,000,000, because the loss rate should be applied to the full receivables balance at twice the historical rate
  2. $1,200,000, because expected losses should reflect forward-looking conditions rather than only historical averages Correct answer.
  3. $600,000, because the historical average is the most objective basis
  4. $0, because losses are recognized only when a specific account is identified as uncollectible

Explanation

Expected credit loss models incorporate forward-looking information, so a forecast doubling of the loss rate implies a 3% rate applied to $40,000,000 of sales, or $1,200,000. Relying solely on historical averages ignores the deterioration the manager expects.

Question 50Business Credit and Financial Management

A borrower proposes to pledge its entire accounts receivable ledger as collateral for a new facility while an existing lender already holds a perfected security interest in the same receivables. Which issue is most critical for the new lender to resolve before advancing funds?

  1. Whether the borrower uses a lockbox for collections
  2. Priority of its security interest relative to the existing perfected lien Correct answer.
  3. Whether the borrower's receivables are insured against customer default
  4. Whether the borrower's sales are seasonal

Explanation

When two lenders claim the same collateral, the new lender must establish where its security interest ranks against the existing perfected lien, often through subordination or payoff. Insurance, lockbox use, and seasonality are relevant but secondary to priority.