Week 3 Small Business Review
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Questions and Answers

What is one benefit of starting a business on a small scale?

  • It allows for testing the viability of the business idea (correct)
  • It requires massive investments right from the start
  • It guarantees immediate success on a large scale
  • It attracts more investors from the beginning

    • Why is it challenging for entrepreneurs to figure out how much starting capital they need?

  • Because they rely solely on outside investors
  • Entrepreneurs' plans often change (correct)
  • Due to lack of creativity
  • Plans for a business remain static

    • What is 'bootstrap financing' as described in the text?

  • Utilizing creativity to maximize existing resources (correct)
  • Hiring full-time employees right from the start
  • Using external investments to fund the business
  • Taking out loans from financial institutions

    • Why is it important for entrepreneurs to get the needed money when they need it?

    <p>To ensure smooth execution of business plans</p> Signup and view all the answers

    What role does an MVP play in the early stages of a business?

    <p>It helps in keeping fixed costs low</p> Signup and view all the answers

    Why do entrepreneurs need to come up with new plans if they can't get the money they need?

    <p>To pivot and adapt to the financial constraints</p> Signup and view all the answers

    What is the main source of funding that comes from friends and family to support an entrepreneur?

    <p>Love money</p> Signup and view all the answers

    What is the purpose of collateral in debt financing?

    <p>To decrease the risk for the lender</p> Signup and view all the answers

    What advantage does debt financing offer in terms of ownership and control?

    <p>Borrowers give up minimal ownership and control</p> Signup and view all the answers

    What is a common reason why companies choose debt financing instead of equity financing?

    <p>To make investments that earn more than the cost of the loan</p> Signup and view all the answers

    How do equity investors typically expect to be rewarded for their investment?

    <p>By sharing ownership and dividends</p> Signup and view all the answers

    What distinguishes angel investors from venture capitalists?

    <p>Angel investors are less restricted but conduct due diligence</p> Signup and view all the answers

    What key advantage does equity financing offer concerning payback requirements?

    <p>Equity financing allows companies to avoid regular payback schedules</p> Signup and view all the answers

    How does equity financing differ from debt financing in terms of collateral pledging?

    <p>Collateral is not required in equity financing</p> Signup and view all the answers

    "Young companies can avoid the burden of regular monthly expenses" is associated with which type of financing?

    <p>Equity financing</p> Signup and view all the answers

    What is a distinguishing feature between debt and equity investors concerning returns on investment?

    <p>Equity investors aim for competitive returns based on risk levels.</p> Signup and view all the answers

    What is one advantage of starting a business on a small scale?

    <p>It helps test if the business model is viable on a larger scale</p> Signup and view all the answers

    Why is it important for entrepreneurs to get the needed money when they need it?

    <p>To reduce the chances of business failure</p> Signup and view all the answers

    What is the purpose of collateral in debt financing?

    <p>To secure the debt with assets in case of default</p> Signup and view all the answers

    How does equity financing differ from debt financing in terms of collateral pledging?

    <p>Debt financing requires giving up ownership stakes as collateral, while equity financing does not.</p> Signup and view all the answers

    Why is it challenging for entrepreneurs to figure out how much starting capital they need?

    <p>Entrepreneurs often face uncertainties and changing circumstances.</p> Signup and view all the answers

    'Bootstrap financing' involves entrepreneurs using their creativity to:

    <p>Stretch existing resources to cover needs until attracting outside investors</p> Signup and view all the answers

    What is the main source of 'Love Money' as described in the text?

    <p>Friends and family</p> Signup and view all the answers

    What is the primary reason why borrowers pledge collateral in debt financing?

    <p>To protect lenders in case of default</p> Signup and view all the answers

    Why is debt financing considered advantageous in terms of ownership and control?

    <p>Entrepreneurs retain ownership without giving up control</p> Signup and view all the answers

    What distinguishes angel investors from venture capitalists based on the text?

    <p>Angel investors invest individually or in networks</p> Signup and view all the answers

    What advantage does equity financing offer concerning payback requirements?

    <p>No need for regular cash flow paybacks</p> Signup and view all the answers

    'Debt financing allows companies to be smart with money' is primarily related to what aspect mentioned in the text?

    <p>$20,000 investment making 20% more money</p> Signup and view all the answers

    What is the primary purpose of collateral in debt financing according to the text?

    <p>To protect lenders in case of default</p> Signup and view all the answers

    'Equity financing doesn't involve pledging collateral' highlights what key advantage mentioned in the text?

    <p>Flexibility in decision-making</p> Signup and view all the answers

    Study Notes

    Evaluating Business Ideas

    • To determine if an idea is good, ask: "Why now, why me?" and "Why will it continue to succeed once others know about it?"
    • Consider: "What's an area where I could go into business without being a test for bigger companies?"

    Starting Small and Failing Cheaply

    • Start with a Minimum Viable Product (MVP) to test the market with low fixed costs and high variable costs
    • Example: Hand labeling drink bottles initially to avoid investing in massive machinery
    • Having a successful business on a small scale is a good indicator of its potential for large-scale success

    Starting Capital

    • Entrepreneurs need money to start their business, but it's challenging to determine how much and when it's needed
    • Bootstrap financing: Using personal resources, including money and time, to make the business attractive to outside investors
    • Types of starting capital:
      • Personal money: Entrepreneurs invest their own funds
      • Love money: Funding from friends and family
      • Grants and start-up prize money: Government or agency grants and competition prizes

    Debt Financing

    • Cost: Interest paid by the borrower
    • Reward: Interest earned by the investor
    • Collateral: Pledged to protect the investor in case of default
    • Advantages:
      • Ownership and control: No need to give up control with debt financing
      • Certainty in payments: Predictable monthly payments help businesses plan their budget
      • Trading on equity: Borrowing to make investments that earn more than the loan cost

    Equity Financing

    • Cost: Giving up some control over the business
    • Reward: Potential returns include dividends and selling ownership for more than the initial investment
    • Investor protection: Shareholders have influence in decision-making, matching their share of ownership
    • Advantages:
      • No regular payback: No need for regular cash flow paybacks
      • No collateral pledging: Company assets remain unencumbered and not at risk
    • Angel investors: Wealthy individuals investing in new ventures for ownership, with the option to invest through ownership or convertible debt

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    Description

    This quiz discusses the criteria for evaluating business ideas, including why an idea would succeed now, the uniqueness factor, and strategies for starting on a small scale. Explore this quiz to understand how to assess the potential success of your business ideas.

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