Small Businesses Term Paper

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Small businesses are the backbone of American economy. They are easier to start, minimum capital is required and if, they succeed, the economy reaps benefits more than it does when the entrepreneur was working as an employee. There is something alluring about a small business -- a typical American tale of rages to riches in the making. A new start-up comes forth and may blossom into one of the most successful businesses of its territory and suddenly we have another American Dream story on our hands. But the same can turn sour when mismanagement, lack of funds, and simple dearth of proper strategies result in failure of the small business venture. So how do we define a small business? According to Moeller (2002):

"In general, if a company has fewer than 500 employees, it is considered a small business, no matter what its annual sales volume is. Using this definition for its survey research, the SBA says that the small business market consists of about 22.4 million businesses. This definition includes the 11 million full-time self-employed people in the U.S. whose businesses do not have employees. For technical purposes, such as government contracting, the SBA uses a combination of sales volume and number of employees."

Despite the failure of many small businesses, it is quite interesting that people still enter the field regularly. It appears that everyone who is employed at some firm, large or small, dreams of running his own business so he could be his own boss, set his own hours and be able to spend more time with family. The allure of having your own business is infinite but there are many pitfalls that are to be avoided if a small business is to become successful in the long run.

Advantages and Disadvantages of small businesses are numerous and it is important to carefully study the possible problems before one decides to move ahead with a venture. If this is any consolation, let us mention here that small businesses succeed as much as they fail. Small businesses have come to occupy a pivotal place in American economy and their history dates back to early 20th century. One well-known radio commentator said of the importance of small businesses in America:

When we speak of business we must not think solely of large capital, huge industries and famous names. These do not comprise American Business. If one should attend an annual convention of the American Bankers Association, for example, one would see around 5,000 bankers in session, but of these 4,950 are men and women who head country banks. They are the small bankers who carry the bulk of the business for the bulk of the people. . . . Small business is a vast network of communications which sends depressive or tonic influence to the country. We are more dependent on the small businessman than we realize-- more than he realizes. The community takes its reading of the national economic temperature from the thermometer of the small businessman's countenance. This is a small-town and small-business country. . . . (Cameron)

Problems with a small business:

There are many reasons a small business might fail. But the two key reasons with startups are lack of vision and dearth of funds. Before setting up a new business, it is important for businessmen to come up with a winning business plan. This business plan is to be used as a map which guides the business in the right direction. It is actually a representation of a person's vision and can help him secure loans. A business plan is a blueprint of your business and its sales and profit projections. Many small business owners start a business without having any idea of what they hope to achieve from this venture or how they plan to run it. This leads to problems both managerial and financial and in many cases results in collapse of the venture. A business plan helps the firm owners know where they want to take the newly established firm and how it plans to get there. It needs to contain all the information about the business, marketing and pricing strategies, sales forecast, previous sales statement, financial situations, available funds and sources of funding currently available. A business plan is therefore defined as 'a set of goals and objectives that are quantified, are course to a specific time frame, and has within it the necessary strategies to accomplish or satisfy the plan' (McKenzie and Schoumacher, 1992).

Another key problem is lack of funds. A small business like any other business requires consistent flow of money. At the time of starting out, the business needs capital which can come from a variety of sources. But securing funds for the business would only be possible if you can convince others of the feasibility of your venture.

The traditional sources include: Banks and credit unions. They will be willing to provide a loan if you approach them with a solid business plan and some proof of good performance in the past. As much as you would want to believe otherwise, the truth is that bankers will make you run from pillar to post before they agree to lend you anything. Traditional sources have proved to be highly unreliable since financing through these means is a very demanding and time-consuming process.

Relatives and Friends:

This is usually the best source of financing for small business owners. Friends and relatives are more willing to lend and have some personal savings to dispose off into reliable hands.

Small business administration: Small business Investment Company is potential source of financing. This organization usually helps you locate venture capital investors for your business.

Venture capital and angel capital investors: These are individuals who are interested in investing in high growth businesses (Cooper). If you have performed well in the past and your business appears all set to take off, look no further. Venture and angel investors are the best source for medium-sized loans.

Other sources include Equipment leasing where you can ask for loan only for certain tools and machinery. Apart from this you have the option of 504 loans that are extended for fixed assets. (Raising money)

Threats from bigger firms:

One main problem with a small business is competition. Since larger firms operate with more capital, more advertising, greater customer base and thus are more likely to succeed than a small venture. For this reason, competition from large firms is always a looming threat. What is even more painful to accept is the behavior of customers who may sympathize with small business owners but wouldn't mind purchasing from larger firms for a variety of reasons. This was best illustrated in 1994 when a campaign against Wal-Mart ballooned in the United States and protestors trued to stop Wal-Mart from expanding and reaching smaller communities. Most people felt that firms like Wal-Mart tread on the territory of small business owners and put them out of business. The following passage from Blackford's article aptly captures the problem:

'In 1994 a decade-old campaign against Wal-Mart, America's largest retailer, exploded. Protesters chanting 'One, two, three, four -- we don't want your Wal-Mart store', opposed the building of new stores ....One opponent -- a self-employed clothing designer in Fort Collins, Colorado -- summarized what was on the minds of many:' I really hate Wal-Mart. Everything's starting to look the same, everybody buys all the same things -- a lot of small-town character is being lost. They disrupt local communities; they hurt small businesses' ... Such opposition illustrates that a concern for small business, and the type of lifestyle that many Americans imagine it engenders, is very much alive in the United States ... However, while the campaign against Wal-Mart caught the attention of Americans, and while many sympathized with small retailers, relatively few took an active part in opposing Wal-Mart. Most Americans liked the company's low prices." (Odaka, Sawai ed. 1999. p. 47)

Advantages of small business

1. Be your own Boss

The one thing that attracts people to start their own business is the idea of being your own boss. As cliched as it may, this idea is one of the main reasons why someone would leave his 8-5 job and invest in a small business. With your own business, you are not answerable to anyone for losses or profits, you don't need to discuss your strategies with others, you can experiment as much as you like and make your own decisions.

2. You keep all the profits

This is an interesting advantage of having your own business. Since you will obviously be working twice as hard and will be doing more than you were in your previous employment, you need to be certain that all profits would directly benefit you and not someone else. This is what usually keeps a businessman going when odds are against him. If there is one reason why most small business owners are willing to put in extra hours and do the job of five…[continue]

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