Group 3 Question 11: Microloans, which are small loans made...

Microloans, which are small loans made to very small businesses, have more generous terms than do typical bank loans. Interest rates are low or even non-existent, and the amount of money that needs to be repaid on a regular basis is much lower than that required by a typical bank loan. Despite this, some new small businesses offered microloans would do better to seek out typical bank loans because _____________.

(A) microloans are not readily available in many parts of the world, including those in which very small businesses are common. Incorrect

than why some new small businesses offered microloans?

(B) any small business that has been in operation for at least ten years will need to establish a working relationship with local banks. Incorrect

we dont know some new small businesses that are offered microloans are in business for at least ten years

(C) new businesses run the risk of acquiring too much debt if they don’t grow quickly enough within the first six months of operation. Incorrect

if this right than more debt should occur by bank loans than by micro loans

(D) a substantial number of small businesses that depend on microloans when they first begin operations are never able to repay the loans and need to declare bankruptcy. Incorrect

if this true than why some new small businesses offered microloans without surveying their prospectiveness

(E) a microloan is often too small to support a business long enough for it to become established. Correct

Microloans, which are small loans made to very small businesses, have more generous terms than do typical bank loans. Interest rates are low or even non-existent, and the amount of money that needs to be repaid on a regular basis is much lower than that required by a typical bank loan. Despite this, some new small businesses offered microloans would do better to seek out typical bank loans because _____________.

(A) microloans are not readily available in many parts of the world, including those in which very small businesses are common.
The last line says that small businesses would rather prefer to take loans from banks than microloans.

(B) any small business that has been in operation for at least ten years will need to establish a working relationship with local banks.
Irrelevant

(C) new businesses run the risk of acquiring too much debt if they don’t grow quickly enough within the first six months of operation.
This could be true for both the kind of loans.

(D) a substantial number of small businesses that depend on microloans when they first begin operations are never able to repay the loans and need to declare bankruptcy.
If this is true then small businesses should definitely not take normal loans from banks.

(E) a microloan is often too small to support a business long enough for it to become established.
If this is true then a small business has a lot of incentive to avoid the much safer microloan and prefer a typical bank loan.

Official Explanation:

Microloans, which are small loans made to very small businesses, have more generous terms than do typical bank loans. Interest rates are low or even non-existent, and the amount of money that needs to be repaid on a regular basis is much lower than that required by a typical bank loan. Despite this, some new small businesses offered microloans would do better to seek out typical bank loans because _____________.

(A) microloans are not readily available in many parts of the world, including those in which very small businesses are common.
(B) any small business that has been in operation for at least ten years will need to establish a working relationship with local banks.
(C) new businesses run the risk of acquiring too much debt if they don’t grow quickly enough within the first six months of operation.
(D) a substantial number of small businesses that depend on microloans when they first begin operations are never able to repay the loans and need to declare bankruptcy.
(E) a microloan is often too small to support a business long enough for it to become established.

Question Type: Complete the Passage / Strengthen
Boil It Down: Microloans offer better terms to small businesses than bank loans; however, small businesses should still go with traditional bank loans because???
Goal: Find the option that best explains WHY small business should still choose a bank loan over a microloan.

Analysis:

This question asks you to provide a missing piece of evidence that will strengthen the conclusion. Anything following the word “because” will be evidence. Anything before it will be a conclusion.

Conclusion: Even though microloans have more favorable terms than do typical bank loans, some new small businesses offered microloans would do better to seek out typical bank loans

It may be that some new businesses need more money than what can be provided with a microloan. If so, then these businesses will do better to deal with typical bank loans, despite the higher costs associated with having to pay interest. This is what choice E states.

(A) microloans are not readily available in many parts of the world, including those in which very small businesses are common.
The conclusion says that some businesses that are offered microloans shouldn’t take them, so it doesn’t matter that some businesses are not offered these kinds of loans. This is outside the scope of our argument.

(B) any small business that has been in operation for at least ten years will need to establish a working relationship with local banks.
This choice refers to businesses that have been around for at least 10 years, and the conclusion is about new businesses. This is outside the scope of our argument.

(C) new businesses run the risk of acquiring too much debt if they don’t grow quickly enough within the first six months of operation.
This doesn’t provide enough information to support the conclusion. It gives us background information that does not directly lead to the conclusion that a typical bank loan is better.

(D) a substantial number of small businesses that depend on microloans when they first begin operations are never able to repay the loans and need to declare bankruptcy.
This choice just states that some businesses can’t pay back the small microloans. This doesn’t lead to the conclusion that a typical bank loan would be better. Clearly, from this choice, microloans are not perfect for everyone. What we need is a comparison: Is a bank loan better, as suggested by the argument?

(E) a microloan is often too small to support a business long enough for it to become established.
This is the correct choice. It explains why some businesses should seek traditional loans even though interest rates are higher: The microloans just aren’t enough.

Don’t study for the GMAT. Train for it.

Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.