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Small businesses are easy to start and develop as compared to large ones. A business is said to be small depending on various factors, which differ from one country to the other. In the U.S., a business is regarded as small if it has less than 500 employees. Other criteria are asset, sales and annual profits. They are vital to any countries economy through providing employment, revenue among others.
The following paper is a description of the concepts, general terms and statistics of small business. It also outlines the benefits the small businesses have on the economy. I will refer to the U.S economy throughout this paper.
A small business is a business in which ownership and operation are privately managed, and whose sales volume is relatively low. Whether a business is small, is usually determined by the number of employees, which are the same time ranges from one country to the other. In the U.S., companies with less than 500 employees are classified as small businesses. Other criteria for small business classification are net profit, assets and sales. A study in the US by Small Business Administration (SBA), indicated that 99.9% of businesses in the U.S operate with less than 500 employees, qualifying them as small businesses. Small businesses in the U.S. are quite influential in job creation and innovation (Levicki, 1984).
Characteristics of small businesses
Spirit of entrepreneurship- Optimism, motivation, enthusiasm and desire to succeed, characterize small businesses owners. Most are not scared about taking risks. This could be attributed to the amount of money invested as compared to large businesses. There are also favorable legislation in place which encourages the establishment of small businesses.
Managerial skills- Leading, planning, organizing, controlling major business activities define management. Small business owners in most cases mostly possess only one of the managerial skills. Managerial skills are limited, especially in important areas of the business such as sales and marketing, finance, insurance, technical, and production.
Funding- Small businesses suffer from limited funding, yet they need money for maximization of opportunities through financing growth. This could be attributed to lack of collateral, with securing an unsecured loan from banks being almost impossible.
Benefits of small businesses to the economy
Small businesses provide many job opportunities, especially due to the low skills required. In US, for instance, small businesses have employed more than half of employees in the private sector. They can be more productive relatively and can, therefore, compete with large firms in offering decent jobs. Small businesses have created more than 60% of jobs per year for the last one decade. This could be attributed to the ease of setting up a small business, with little capital needed, also cheap labor. 50% of non farm private Gross Domestic Product has been created by the small businesses. These businesses are also employers to more than 41% of high-tech workers like engineers and scientists. 45% of the total payroll of the US private sector is paid by small businesses.
These businesses have their shortcomings too, the major one being lack of proper business plans. A business plan enables one to roll out the plan and strategize wisely before start a business. There are also numerous requirements from the government authorities before one set out for the business venture. The major hurdle, though, is financing the businesses. Most banks prefer to give loans to businesses that are already developed, because, as such, they have collateral. Small businesses do not have a property to give out to the banks as collateral.
Small businesses are vital to the economies of many countries, especially the developed ones. They provide employment and generate revenue contributing to the GDP. In US, for instance, small businesses generate more than half of non-farm, private gross domestic product.