About 90% of technology and media companies fail within the first three years of business.
Question
Use the passage to answer the question.
How does this tendency affect the loans granted to new technology and media companies?
(1 point)
Responses
These companies’ loans are smaller.
These companies’ loans are smaller.
These companies are unable to obtain loans.
These companies are unable to obtain loans.
These companies’ loans have higher interest rates.
These companies’ loans have higher interest rates.
These companies are loaned money by many different institutions.
This passage suggests that technology and media companies have a high risk of failure within the first few years. When traditional lenders, like banks, assess the risk associated with a business loan, they consider the likelihood of the business succeeding and repaying the loan. A high failure rate within an industry can lead to more stringent lending criteria. While the passage doesn't specify exactly how this tendency affects loans, we can infer that lenders may be more cautious when dealing with these types of businesses.
Given the high risk, the most likely outcomes for these companies seeking loans could be:
- Smaller loan amounts, as banks may be hesitant to lend large sums to businesses in an industry with a high failure rate.
- Higher interest rates, to compensate for the increased risk that the lenders are taking on.
The passage doesn’t provide evidence that these companies are unable to obtain loans altogether or that they are loaned money by many different institutions. Therefore, the most fitting choice, based on typical lender behavior in response to high risk, is:
These companies’ loans have higher interest rates.
This response takes into account the increased risk that banks have to account for when loaning to businesses in a sector with a high failure rate.