Small businesses are at the core of every community around the world. From your local barber to your local grocery. They are found in every part of the world and represent the largest part of many economies in the world. Small business can also be defined in terms of its annual revenue, number of employees and size of the assets they have
We can also define a small business in terms of size. According to the SBA (small business administration in the US), A small business is usually defined as a private corporation, partnership, or sole proprietor that has less than 1500 employees. Additionally, depending on the type of industry you are in, the definition might change.
It is good to check the definition of what small business means depending on which country you are in. You can check the SBAs size standards. A small business is also considered small if it makes less than $35.5 million in sales in a year.
|Industry||Not to Exceed|
|Manufacturing and Mining||1500 employees|
|Wholesale Trade||250 employees|
|Retail and service||$7.5million average annual revenue and below 500 employees|
|General and Heavy Construction||$28.5 million average annual revenue|
|Special Trade Contractors
|$12 million average annual revenue
$0.75 million average annual revenue
What are the Features of a Small Business?
- Small businesses have a small number of employees to around 1500 or less.
- They have a small market area which the serve their customers. For example, a local grocery, bakery, or a supermarket.
- They do not have other outlets. This generally means that they do not operate or have other business in other locations.
- They have lower sales/ revenue as compared to large entities.
- They are not listed in the stock exchange
For your business to be considered small in the United States, there are a few parameters to be met.
- Is your business privately owned?
- Is your business profit-oriented?
- Is it located within the United States territories?
- Do you have a minority share? Meaning you do not trade in the stock exchange.
What Is The Purpose Of Classifying Small, Business?
Businesses are classified so that each is able to compete as well as enjoy the benefits that come along with it. A small business in the united states is classified for the following reasons;
- It will help a small business get loans and grants from the government. However, they have some terms and conditions you must meet for you to get the loans.
- It helps vie for contracts from the government, which large corporations do not enjoy.
- It helps the business get research grants. This is a good avenue for small businesses that are in line with innovations and want to research.
- They also benefit from tax breaks such as health insurance tax credit which can be claimed by companies that have less than 25 employees.
- They also get help from other large companies through the National Federation of Independent Businesses as well as the Small Business Entrepreneurship Council. This can be in terms of funding, resources, education, or even discounts on certain products.
The Concept Behind Small Business
Four notions are mostly confused when we talk about small business.
Entrepreneurship –is the act of aiming to expand the business to meet international sales. They can have more employees with time.
Self-employment – this is whereby you start a business with the intention of making a profit to the proprietor. They mainly don’t have any intention of growing large or expanding.
A startup is a business that started with the aim of growing into a big business. They usually are very innovative in nature.
Small business is a small company that may have the intention of expanding or not. It is characterized by a few employees. They are also privately owned.
Small Business Definitions
Each country has its own definition of what a small or small business is.
The federal government classifies small businesses, according to the industry. The SBA has a table of classifications of business as per the industry. For instance, a manufacturing company that has 1500 employees and an annual return of more than $20 million is considered a small business. In the same way, a grocery shop with 10 employees and a turnover of 1million dollars annually is also considered a small business.
Small businesses in Canada can be defined as a business that has less than 100 paid employees. While small business takes up the largest chunk in Canada’s economy, it is still hard to make a definitive definition of what is considered to be a small business.
Small businesses are made up of 5 to 100 employees while service-based firms that have 5- 50 staff are also considered to be small businesses.
To the bankers, small businesses are not defined in terms of employees rather than the credit limits of the companies. These are companies that have less than half a million in credit limit. Above that, they are considered to be medium-sized companies while those over 1million in credit limit are considered to be large companies.
To the export development corporation, small businesses are those with less than 1million in export sales. They mostly concentrate on the export trade to define a small business.
On top of that, the Canada small business financing program defines small businesses as those that have less than 5 million in annual revenue. The program is mandated by providing grants, loans, and other programs from the government.
The European Union
They describe small business as one that has less than 50 employees and makes less than 7million pounds in revenue. Other SMEs are categorized as below;
- Micro-enterprises: have less than 10 employees
- small enterprises: have 10-49 employees
- medium-sized enterprises: have between 50-249 employed staff
- small and medium-sized enterprises (SMEs): have between 1-249 employed staff.
- large enterprises: have more than 250 employees.
The fair work act 2009 explains a Small business as one that has less than 15 employees as compared to the medium-sized companies that have a minimum of 250 people.
What are the advantages of small businesses?
- They are easy to start and operate as they require little capital.
- The proprietor is able to connect with the customers, hence creating a good reputation.
- You are your own boss
- It is easy to diversify and change with time as the market changes
- They are flexible in that you can do another job in your free time.
- You are able to realize outstanding profits as compared to working for someone.
Disadvantages of Small Business
- Completion from bigger companies pose great competition and may lead you to close your business
- The Potential lack of capital to start or expand your business. This may be due to fewer profits gained to sustain or you are just starting up your business.
- It requires a lot of time commitment for the business to pick up
- There is too much uncertainty as external factors such as pandemics can affect your business.
Sources Of Funds For Small Business
- Personal savings are a great source of funds for small business owners. Most at times the entrepreneurs work different jobs to sustain and supplement their actual jobs.
- Angel investors have become a sort of good source of funds currently. This is because most of them look for a business which aligns with their interest and acts as their hobbies.
- Family and friends are always the second option for many people as they provide unsecured loans. Most of them may let you not pay the loan even which is a good advantage.
- Bank loans are common to most people. This is because they have an unlimited stream and can finance your business easily.
- Forming partnerships have also been found to be a good source of income. Despite sharing the profits you can easily get funds to start your small business.
What Is The Contribution Of Small Business To The Economy?
Small businesses have a lot to contribute to the economy as well as the community at large.
- Small businesses are a source for employment hence putting food on the table for many people. For example, in the US alone, most people are mainly employed in small businesses. Despite that, they contribute to almost 97% of the economy’s GDP.
- It is a major contributor to the economy’s gross domestic product in terms of tax compliance.
- They help support large companies. They do this by providing small parts that companies need to drive their daily activities. For example, a small mechanic shop servicing vehicles for a company like IBM.
In summary, small businesses have different definitions for different agencies and countries. Before starting up your business, you better find out what category you fall under in your countries. This is because you may benefit from government contracts and grants that big companies do not vie for. It is also good to research so that you know which tax category your business falls under.