Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. What businesses are defined as "small" in terms of government support and tax policy varies depending on the country and industry. Small businesses range from 15 employees under the Australian Fair Work Act 2009, 50 employees according to the definition used by the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.
Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online businesses, such as web design and programming, etc.
- 1 Characteristics of small businesses
- 2 Advantages of small business
- 3 Problems faced by small businesses
- 4 Benefits of supporting local business
- 5 Marketing the small business
- 6 Contribution to the economy
- 7 Sources of funding
- 8 Business networks and advocacy groups
- 9 See also
- 10 References
- 11 External links
Characteristics of small businesses
Researchers and analysts of small or owner-managed businesses generally behave as if nominal organizational forms (e.g., partnership, sole-trader or corporation) and the consequent legal and accounting boundaries of owner-managed firms are consistently meaningful. However, owner-managers often do not delineate their behavior to accord with the implied separation between their personal and business interests. Lenders also often contract around organizational (corporate) boundaries by seeking personal guarantees or accepting privately held assets as collateral. Because of this behavior, researchers and analysts should reject the relevance of the organizational types and implied boundaries in many contexts relating to owner-managed firms. These include analyses that use traditional accounting disclosures, and studies that view the firm as defined by some formal organizational structure.
The legal definition of "small business" varies by country and by industry. In the United States the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than 250 employees for manufacturing businesses and less than $7 million in annual receipts for most non manufacturing businesses. The definition can vary by circumstance – for example, a small business having fewer than 25 full-time equivalent employees with average annual wages below $50,000 qualifies for a tax credit under the health care reform bill Patient Protection and Affordable Care Act.
The European Union generally defines a small business as one that has fewer than 50 employees. However, in Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than 15 employees. By comparison, a medium sized business or mid-sized business has less than 500 employees in the US, and fewer than 200 in Australia.
In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.
The table below serves as a useful guide to business size nomenclature.
Business Size definitions
• Most cells reflect size not defined in relevant legislation • Some definitions are multi-parameter, e.g., by industry, revenue, market share
According to a 2007 Survey of Business Owners, 7.8 million businesses in the United States were owned or led by a woman, representing 28.7% of overall business ownership.
Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchiser). McDonald's and Subway are examples of a franchise. The small business owner can leverage a strong brand name and purchasing power of the larger company while keeping their own investment affordable. However, some franchisees conclude that they suffer the "worst of both worlds" feeling they are too restricted by corporate mandates and lack true independence.It is an assumption that small business are just franchisees, but the truth is many franchisors are also small business, Although considered to be a successful way of doing business, literature has proved that there is a high failure rate in franchising as well, especially in UK, where a research identifies out of 1658 franchising companies operating in1984 only 601 remained existent 1998, a mere 36%.
A retailers' cooperative is a type of cooperative which employs economies of scale on behalf of its retailer members. Retailers' cooperatives use their purchasing power to acquire discounts from manufacturers and often share marketing expenses. It is common for locally owned grocery stores, hardware stores and pharmacies to participate in retailers' cooperatives. Ace Hardware, True Value, and NAPA are examples of a retailers' cooperative.
Advantages of small business
A small business can be started at a low cost and on a part-time basis. A small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity.
Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses. Freedom to operate independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors. However, entrepreneurs have to work for very long hours and understand that ultimately their customers are their bosses.
Several organizations, in the United States, also provide help for the small business sector, such as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.
Small businesses (often carried out by family members) adjust quicker to the changing conditions, however they are closed to the absorption of new knowledge and employing new labour from outside.
Problems faced by small businesses
Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is undercapitalization. This is often a result of poor planning rather than economic conditions - it is common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have not less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's debt should he end up in bankruptcy court, under the theory of undercapitalization.
In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners underprice their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.
In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs, taxes and tax compliance. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.
Contracting fraud has been an ongoing problem for small businesses in the United States. Small businesses are legally obligated to receive a fair portion (23 percent) of the total value of all the government's prime contracts as mandated by the Small Business Act of 1953. Since 2002, a series of federal investigations have found fraud, abuse, loopholes and a lack of oversight in federal small business contracting, which has led to the diversion of billions of dollars in small business contracts to large corporations.
Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly. Some of this misunderstanding arises from the failure to distinguish between small business managers as entrepreneurs or capitalists. While nearly all owner-managers of small firms are obliged to assume the role of capitalist, only a minority will act as entrepreneur.
Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success. Networking and social media has been used as a major tool by small business in UK, but most of them just use a scatter-gun approach in a desperate attempt to exploit the market which has proven to be on no success. Over half of small firms lack a business plan. A Business plan is considered one of the most important factors for its success, business planning is associated with positivity in growth and if you are looking at funding most of them require a business plan, and this also serves as a strategic planning document which soon acts as a bible for decision making  An international trade survey reveals that British share of chamber business who are exporting rose from 32% in 2012 to 39% in 2013, although this may seem positive in reality the growth is slow as small business owners shy away from exporting due to perceived barriers. Learning the basics of a foreign language could be the solution to open new markets doors, it is a reality that not all foreign nations speak English. China is stated to grow by 7.6% in 2013 and still sadly 95% of business owners who want to export to china have no desire and no knowledge to learn their local language.
Small business bankruptcy
When small business fails, the owner may file bankruptcy. In most cases this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors there is little advantage to going to the expense of a corporate bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy. However, corporate assets are normally not exempt, hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy. Researchers have examined small business failures in some depth, with attempts to model the predictability of failure.
Small Business Loan Programs and Debt Financing
The Suppliers Pay Initiative expansion program announced by the White House and Small Business Administration in 2014, 17 November, demonstrated a commitment to strengthen the small business sector and increase the hiring of workers. A further 21 companies have joined the pledge adopted by 26 companies previously in July, designed to ensure suppliers from smaller businesses are paid faster. The initiative is intended to provide them with working capital at a more affordable cost, thereby reducing short-term borrowing costs and enabling more resources, to be directed towards investment in their business growth and increased hiring of workers.
The SBA assist small business owners with various financing programs, offered by Federal, state and local governments, designed to provide low-interest loans, venture capital, as well as scientific and economic development grants. The programs are flexible with specified qualifications for each one. The Small Business Administration can assist owners in facilitating a loan, from a guaranteed bond, a third party lender, or venture capital.
Although the SBA does not lend directly to small businesses, it does determine guidelines for loans made by its financial partners, for example; community development organizations, established lenders and micro-lending institutions. Guarantees are given by the SBA that the loans will be repaid, eliminating partial risk to their lending partners. When a small business owner makes application for an SBA loan, they are in effect applying for a commercial loan, but structured to meet SBA requirements and supported by an SBA guarantee. This guaranteed loan facility from the SBA is not available to small business owners who have access to other financing sources, on reasonable terms. Facts related to small business financing facilities indicate that approximately 56% percent of small businesses owners utilize traditional financing, for example; bank line credit, mortgage loan, or a leasing facility. A further about 39% has made use of their personal credit cards for business purposes, while 28% used business credit cards! The dominant provider of external financing to small business enterprises, are commercial banks, to the extent of 37%.
Small Business Financial Factors
Business finance became influences in the lives of pioneers and adventurers in the 17th and 18th centuries, who challenged the elements to create new and better lifestyles. In 19th century America, small homesteads spread quickly across the vast frontier with small farms being established and various economic principles adopted that were associated with the individual enterprise. As the populations increased in the towns and cities, the importance and influence of these economic principles assumed greater importance, with the desire to own a business expanding, to include various craftsmen, professionals and trading merchants.
According to the Bureau of Labor Statistics, Business Employment Dynamics, approximately two-thirds of new businesses with employees, generally survive a minimum of 2 years, with about 50% surviving at least 5 years. As a natural progression, following the initial volatile years of a business operation, the rate of survival attains a higher level. Finance is a critical influence in the survival factor of businesses, which has not experienced significant change over the years and remaining relatively unaffected by a negative economy. Statistics from BLS, Business Employment Dynamics, show that new businesses started in the expanding economies of 1995 and 2005, or before the downturn in 2000 and immediately following this downturn, experienced almost identical survival ratios.
The United States Small Business Administration (SBA) revealed there are 28 million small business enterprises in America, with a comparative ratio of 1162 to 1 corporation! This is enhanced by the fact that between 60% and 80% of new jobs created, are derived from small businesses. It must however, be taken into account that these statistics will fluctuate as some small businesses expand to a degree and become classified as large organizations. A further and influencing factor is the creation of new, small businesses, which from 1999 to 2000, accounted for 75 percent of all new jobs and by 2010, for 75% net of new jobs in the USA. The SBA found from more recent studies that when compared to larger companies, generally, a small business will depend more on the capital injected by the owner than that provided by external debt. One factor is that the cost incurred from borrowed money is significantly higher for small businesses than larger operations.
The contribution made by small businesses to the United States payroll is 44%; researches indicate the small business workforce in America, numbering about 77 million people, ranks the 17th most populous in the world.
Small businesses can encounter several problems related to Corporate social responsibility due to characteristics inherent in their construction. Owners of small businesses often participate heavily in the day-to-day operations of their companies. This results in a lack of time for the owner to coordinate socially responsible efforts. Additionally, a small business owner's expertise often falls outside the realm of socially responsible practices contributing to a lack of participation. Small businesses also face a form of peer pressure from larger forces in their respective industries making it difficult to oppose and work against industry expectations. Furthermore, small businesses undergo stress from shareholder expectations. Because small businesses have more personal relationships with their patrons and local shareholders they must also be prepared to withstand closer scrutiny if they want to share in the benefits of committing to socially responsible practices or not. 
While small businesses employ over half the workforce  and have been established as a main driving force behind job creation  the quality of the jobs these businesses create has been called into question. Small businesses generally employ individuals from the Secondary labor market. As a result, in the U.S. wages are 49% higher for employees of large firms. Additionally, many small businesses struggle or are unable to provide employees with benefits they would be given at larger firms. Research from the U.S. Small Business Administration indicates that employees of large firms are 17% more likely to receive benefits including salary, paid leave, paid holidays, bonuses, insurance, and retirement plans. Both lower wages and fewer benefits combine to create a job turnover rate among U.S. small businesses that is 3 times higher than large firms. Employees of small businesses also must adapt to the higher failure rate of small firms. In the U.S. 69% last at least 2 years, but this percentage drops to 51% for firms reaching 5 years in operation. The U.S. Small Business Administration counts companies with as much as $35.5 million in sales and 1,500 employees, depending on the industry. Outside government, companies with less than $7 million in sales and fewer than 500 employees are widely considered small businesses.
Benefits of supporting local business
By opening up new national level chain stores, the profits of locally owned businesses greatly decrease and many businesses end up failing and having to close. This creates an exponential effect. When one store closes, people lose their jobs, other businesses lose business from the failed business and so on. In many cases large firms displace just as many jobs as they create. Not only that but it also increases the costs of taxes. Instead of increasing a community’s revenue, big businesses actually shift money away from the community. Independent businesses depend on the many resources that a community can supply. They hire architects, contractors, hardware stores, interior designers, local advertisement agencies, accountants, business attorneys, and insurance companies. Local businesses also are more likely to supply locally produced products than chains, ultimately benefiting their community. Large corporations on the other hand eliminate the need for local goods and services.
A lack of diversity can decrease the revenues in a community. When towns are interesting, they attract people from out of town. More personality and individuality can lead to more tourists, which, in turn leads to money placed directly into the community. The diversity of businesses is also important to the individuality of consumers. Often, independent retailers can adjust the products that they sell in order to fit the needs of their consumers and the unique tastes of their community. Local businesses are also more likely to support unique, new, and/or controversial products. Local bookstores can provide controversial books and can support small authors or local authors. The same idea helps out with local art and music. Bookstores and music shops are more likely to support local art and music than the mainstream stuff that large corporations provide.Business chains decrease a community’s individuality because they ultimately choose what products reach their customers. This greatly narrows what products are available and shrinks diversity.
Marketing the small business
Finding new customers is the major challenge for Small business owners. Small businesses typically find themselves strapped for time but in order to create a continual stream of new business, they must work on marketing their business every day.
Common marketing techniques for small business include networking, word of mouth, customer referrals, yellow pages directories, television, radio, outdoor (roadside billboards), print, and internet marketing. Electronic media like TV can be quite expensive and is normally intended to create awareness of a product or service. Another means by which small businesses can advertise is through the use of "deal of the day" websites such as Groupon and Living Social. These Internet deals encourage new visitors to small businesses.
Many small business owners find internet marketing more affordable. Google AdWords and Yahoo! Search Marketing are two popular options of getting small business products or services in front of motivated Web searchers. Successful online small business marketers are also adept at utilizing the most relevant keywords in their site content. Advertising on niche sites can also be effective, but with the long tail of the internet, it can be time intensive to advertise on enough sites to garner an effective reach.
Creating a business Web site has become increasingly affordable with many do-it-yourself programs now available for beginners. A Web site can provide significant marketing exposure for small businesses when marketed through the Internet and other channels. Some popular services are WordPress, Joomla Squarespace and EXAI .
Social media has proven to be very useful in gaining additional exposure for many small businesses. Many small business owners use Facebook and Twitter as a way to reach out to their loyal customers to give them news about specials of the day or special coupons and generate repeat business. The relational nature of social media, along with its immediacy and 24-hour presence lend intimacy to the relationship small businesses can have with their customers, while making it more efficient for them to communicate with greater numbers. Facebook ads are also a very cost-effective way for small businesses to reach a targeted audience with a very specific message.
In addition to the social networking sites, blogs have become a highly effective way for small businesses to position themselves as experts on issues that are important to their customers. This can be done with a proprietary blog and/or by using a backlink strategy wherein the marketer comments on other blogs and leaves a link to the small business' own Web site.
A solid public relations strategy that utilizes speaking engagements, press releases, feature stories, events and sponsorships can also be a very cost-effective way to build a loyal following for a small business.
Designing a Marketing Plan for Small Businesses
- Market Research – To produce a marketing plan for Small businesses, research needs to be done on similar businesses which should include desk and field research. This gives an insight in the target group’s behaviour and shopping patterns. Analysing the competitor’s marketing strategies makes it easier for Small business to gain market share.
- Marketing mix – Marketing mix is a crucial factor for any business to be successful. Especially for a Small business, competitor’s marketing mix can be very helpful. An appropriate market mix helps boost sales.
- Product Life Cycle – After launch of the business, crucial points of focus should be increasing growth phase and delaying maturity phase. Once the business reaches maturity stage, an extension strategy should be in place. Re-launching is also an option at this stage. Pricing strategy should be flexible and based on the different stages of the PLC.
- Promotion Techniques – Its preferable to keep promotion expenses as low as possible. ‘Word of mouth’, ‘Email marketing’, ‘Print-ads’ in local newspapers etc. can be effective.
- Channels of Distribution – Selecting an effective channel of distribution may reduce the promotional expenses as well as overall expenses for a Small business.
Contribution to the economy
In the US, small business (fewer than 500 employees) accounts for more than half the nonfarm, private GDP and around half the private sector employment. Regarding small business, the top job provider is those with fewer than 10 employees, and those with 10 or more but fewer than 20 employees comes in as the second, and those with 20 or more but fewer than 100 employees comes in as the third (interpolation of data from the following references). The most recent data shows firms with fewer than 20 employees account for slightly more than 18% of the employment. According to "The Family Business Review," "There are approximately 17 million sole-proprietorships in the US. It can be argued that a sole-proprietorship (an unincorporated business owned by a single person) is a type of family business" and "there are 22 million small businesses (fewer than 500 employees) in the US and approximately 14,000 big businesses." Also, it has been found that small businesses created the most new jobs in communities, "In 1979, David Birch published the first empirical evidence that small firms (fewer than 100 employees) created the most new jobs" and Edmiston claimed that "perhaps the greatest generator of interest in entrepreneurship and small business is the widely held belief that small businesses in the United States create most new jobs. The evidence suggests that small businesses indeed create a substantial majority of net new jobs in an average year." Local businesses provide competition to each other and also challenge corporate giants.
Of the 5,369,068 employer firms in 1995, 78.8 percent had fewer than 10 employees, and 99.7 percent had fewer than 500 employees.
Sources of funding
Small businesses use several sources available for start-up capital:
- Self-financing by the owner through cash, equity loan on his or her home, and or other assets.
- Loans from friends or relatives
- Grants from private foundations
- Personal savings
- Private stock issue
- Forming partnerships
- Angel investors
- Financial Platforms such as LendingClub and OnDeck
- SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans
Some small businesses are further financed through credit card debt—usually a poor choice, given that the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. Recent research suggests that the use of credit scores in small business lending by community banks is surprisingly widespread. Moreover, the scores employed tend to be the consumer credit scores of the small business owners rather than the more encompassing small business credit scores that include data on the firms as well as on the owners. Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business. The SBA also requires business owners to pledge personal assets and sign as a personal guarantee for the loan.
Canadian small businesses can take advantage of federally funded programs and services. See Federal financing for small businesses in Canada (grants and loans).
On October 2010, Alejandro Cremades and Tanya Prive founded the first equity crowdfunding platform for small businesses in history as an alternative source of financing. The platform operates under the name of Rock The Post.
Business networks and advocacy groups
Small businesses often join or come together to form organizations to advocate for their causes or to achieve economies of scale that larger businesses benefit from, such as the opportunity to buy cheaper health insurance in bulk. These organizations include local or regional groups such as Chambers of Commerce and Independent business alliances, as well as national or international industry-specific organizations. Such groups often serve a dual purpose, as business networks to provide marketing and connect members to potential sales leads and suppliers, and also as advocacy groups, bringing together many small businesses to provide a stronger voice in regional or national politics. In the case of Independent business alliances, promoting the value of locally-owned, independent business (not necessarily small) through public education campaigns is integral to their work.
Small Business Development Centers (SBDCs), operate in all 50 states, provide free and confidential counseling and low-cost training to small businesses.
The largest regional small business group in the United States is the Council of Smaller Enterprises, located in Greater Cleveland. United Kingdom trade and Investment (www.ukti.gov.in) gives out research in different markets around the world, also research in program planning and promotional activities to exporters. The BEXA (British Exporters Association) role is to connect new exporters to expert services, it can provide details about regional export contacts, who could be made informally to discuss issues. Trade associations and all major banks could often provide links to international groups in foreign markets, some could also help set up joint venture, trade fairs etc.
- American Independent Business Alliance
- Big business
- Business Alliance for Local Living Economies
- Distributism - Distributism strongly emphasizes the importance of small business
- Federation of Small Businesses
- Independent telephone company
- Localism (politics) versus Transnational corporations
- Market capitalization
- National Federation of Independent Business
- Small Business Administration
- Small Business Innovation Research (SBIR)
- Small business software
- Small Business Technology Transfer (STTR)
- Small-scale Project Management
- Small start units
- Small is Profitable
- S corporation
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