A small business may be defined as a business with a small number of employees. The legal definition of "small" often varies by country and industry, but is generally under 100 employees. These businesses are normally privately owned corporations, partnerships, or sole proprietorships.
Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: small shops, hairdressers, solicitors, lawyers, accountants, restaurants, guest houses, photographers. The smallest businesses, often located in private homes, are called microbusinesses.
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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 no 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 insuring that the business has enough capital, the small business owner must also be mindful of gross margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the gross margin exceeds 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 impossible to break even. The good news is that cost controls or a price increase can 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 and taxes. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.
Certification and Trust
Building trust with new customers can be a difficult task for a new and establishing business. Some organizations like the Better Business Bureau and the International Charter now offer Small Business Certification, which certifies the quality of the services and goods you produce and can encourage new and larger customers. These services may require a few hours of work, but a certification may reassure potential customers. However, the most effective way to earn trust is through customer referrals.
A good accountant is a requirement. A retired person can usually be located for part-time work. There is a wide gulf between an accountant and a bookkeeper. An accountant can do everything from initial entry right through tax returns and financial statements.
Sources of Funding
There are several sources available for start-up capital. The owner can finance it himself through his savings or an equity loan on his home or other assets. The owner could use financing via a stock issue (although there would be legal problems if it were offered to the general public). A partnership could be formed or perhaps a venture capitalist would provide funds if the business venture plans were sound enough. Relatives could also loan money but the owner should realize that if anyone else participates in the venture some elements of control will be lost.
Financing a business with credit card debt is usually a poor choice, the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. 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.