Small business
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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 500 employees in the United States while under 50 employees in the European Union (In contrast, the American definition of mid-sized business by the number of employees is generally under 500 while 250 is for that of European Union). These businesses are normally privately owned corporations, partnerships, or sole proprietorships.
However, other methods are also used to clasify small companies, such us annual sales (turnover), assets value or net profit (balance sheet), alone or in a mixed definition. This criteria is followed by the European Union, for instance (headcount, turnover and balance sheet totals).
Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: small shops, hairdressers, tradesmen, solicitors, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing etc. Small businesses are usually independent.
The smallest businesses, often located in private homes, are called microbusinesses (term used by international organizations such as the World Bank and the International Finance Corporation) or SoHos. The term "mom and pop business" is a common colloquial expression for a single-family operated business with few (or no) employees other than the owners. When judged by the number of employees, the American and the European definitions are the same: under 10 employees.
Contents
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* 1 Problems faced by small businesses
o 1.1 Certification and Trust
o 1.2 Contribution to the Economy
* 2 Sources of Funding
* 3 International Differences
* 4 See also
[edit] 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 ensuring 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 be 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.
[edit] 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 produced 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.
[edit] Contribution to the Economy
Small Business is the major job provider in most economies. The top job provider is those with less than 10 employees, and those with 10 or more but less than 20 employees comes in as the second, and those with 20 or more but less than 50 employees comes in as the third.
[edit] Sources of Funding
Small businesses use several sources available for start-up capital:
* Self-financing by the owner through an equity loan on his or her home or other assets.
* Loans from friends or relatives
* Private stock issue
* Forming partnerships
* 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. 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.
[edit] International Differences
The challenges facing small business owners vary from country to country, based on the overall business climate as well as the regulatory framework of each geographic location. It is extremely important for business owners to understand the legal requirements and obligations in their particular country of operation.
