Chapter Seven Key Terms Business 101

Reasons to launch a small business

• Greater financial success

• Independence

• Flexibility

• Challenge

• Survival

Entrepreneurs

People who risk their time, money, and other resources to start and manage a business

The Entrepreneurial Mindset

• Entrepreneurs aim to change the world through goods or services

• Hope to better themselves, but most do not expect huge, transformative growth

Entrepreneurial Characteristics

• Vision

• Self-reliance

• Energy

• Confidence

• Tolerance of uncertainty

• Tolerance of failure

Internal locus of control

A deep-seated sense that the individual is personally responsible for what happens in their life

External locus of control

A deep-seated sense that forces other than the individual are responsible for what happens in their life

Entrepreneurs and their high levels of self-reliance are characterized by what?

an internal locus of control

Personal Resources

• Friends

• Family

• Personal credit cards

Loans

Sources include commercial banks, U.S. Small Business Administration (SBA), and peer-to-peer lending

Crowdfunding

Process of funding ventures by raising money from a large number of investors via the internet

Angel investors

Individuals who invest in start-up companies with high growth potential in exchange for a share of ownership

Venture capital firms

Companies that invest in start-up businesses with high growth potential in exchange for a share of ownership

Market niche

A small segment of a market with fewer competitors than the market as a whole. Market niches tend to be quite attractive to small firms

Necessity entrepreneurs

launch a business because they believe it is their only economic option

Many small firms have lower what?

overhead costs

Small firms can develop much more personal relationships with?

Individual customers

Technology, especially the internet and online tools, have opened what for small businesses?

New opportunities

Small Business Threats

• High risk of failure

• Lack of knowledge and experience

• Too little money

• Bigger regulatory burden

• High health insurance costs

Starting Your Business From Scratch Pros:

• It’s all you: your concept, your decisions, your structure, and so on

• You don’t have to deal with the prior
  owner’s bad decisions

Starting Your Business From Scratch Cons:

• It’s all you. That’s a lot of pressure.

• It takes time, money, and sheer sweat equity to build a customer base.

• Without a track record, it’s harder to get credit from lenders and suppliers.

• From securing permits to hiring employees, the logistics of starting a business can be challenging.

Buying an Established Business Pros

• The concept, organizational structure, and operating practices are already in place.

• Relationships with customers, suppliers, and other stakeholders are established.

• Getting financing and credit is less
  challenging.

Buying an Established Business Cons

• Working with someone else’s idea can be a lot less fun for some entrepreneurs.

• You may inherit old mistakes that can range from poor employee relations to pending lawsuits.

Buying a Franchise Pros

• In most cases, you’re buying your own piece of a well-known brand and proven way of doing business.

• Typically, management expertise and consulting come with the franchise package.

• Franchisors occasionally offer not just advice but also the financing that can make the purchase possible.

• These advantages add up to a very low 5% first-year failure rate.

Buying a Franchise Cons

• You have fewer opportunities for creativity since most agreements tie you to franchise requirements.

• If something goes wrong with the national brand (e.g., E. coli at a burger joint), your business will suffer, too.

• The initial purchase price can be steep, and that doesn’t include the ongoing percent-of-sales royalty fee.

Small Business Administration (SBA)

An agency of the federal government designed to maintain and strengthen the nation’s economy by aiding, counseling, assisting, and protecting the interests of small businesses

• Provides resources to small business owners

Strategies for long-term success

• Gain experience

• Learn from others

• Educate yourself

• Access SBA resources

Small Business Development Centers (SBDCs)

Local offices—affiliated with the Small Business Administration—that provide comprehensive management assistance to current and prospective small business owners

SCORE (Service Corps of Retired Executives)

An organization—affiliated with the Small Business Administration—that provides free, comprehensive business counseling for small business owners from qualified volunteers

Business plan

A formal document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives

Business plans include?

• Executive Summary

• Descriptions of business

• Complete financial data and plan

• Appendix

How do small businesses play a vital role in the U.S. economy?

• Comprise 99.9% of all U.S. businesses and 47.1% of private sector employees

• Create new jobs

• Fuel innovation

• Vitalize inner cities

Societies need entrepreneurs to ensure?

• New ideas actualize

• People are able to self-employ when their economy does not provide for their basic needs

Key factors that influence rates of entrepreneurship?

• Per capita income

• Opportunity costs

• Cultural/political environment

Per capita incom

Rates are higher for “necessity entrepreneurship”— where people have few options

Opportunity costs

Lower in countries that provide a high level of employment protection

Cultural/political environment

Complex regulations or lack of cultural support contribute to low rates