The small business

Over the past year, near-constant references to the gloomy state of the world economy have crept from the front pages of newspapers straight into our daily lives, becoming pretty much unavoidable. At work or out shopping, we’re hard-pressed not to come across some indication of the current downturn, whether it’s reflected in our diminished shopping budgets, shrinking overdrafts or else our harder-to-maintain credit scores. In this context, there are those who might consider any attempt to start a business – be it a small business or any other type of financially-challenging initiative – as downright insane. There’s a great deal of reason in taking this particular view: the current credit crunch makes it more difficult for would-be entrepreneurs to access small business grants (or else meet eligibility criteria for receiving small business loans), small business administration and planning might prove doubly challenging, under-capitalization is harder to avoid, banks are reluctant to up overdraft limits. However, as the old saying goes, one man’s trash is another man’s treasure – in other words, the downturn may prove the best time for well thought-out, carefully targeted small business ideas to hit their mark and provide a cautiously optimistic outlook for their initiators.

What is a small business? The definitions vary, although there are certain parameters that remain constant. The first is that a small business is typically an independently owned corporation, a partnership or sole proprietorship that is operated privately. Other criteria have to do with the number of employees (which must not be in excess of between 50 and 100, according to some legal definitions or may reach up to 500 according to others), sales volume (which is expected to be relatively small), annual turnover and net profits. One thing to keep in mind is that small businesses are crucial for the world economy. In the US alone, data provided by the Department of Commerce indicates that small companies represent over 99% of all employer firms, employ over 50% of all private sector employees and are responsible for paying 44 percent of the total private payroll. In Europe, 88 million people work for small businesses, while the latter account for no less than two-thirds of overall private-sector employment.

The small or personal businesses are therefore a good option for those currently considering self-employment – if, that is, they are also feeling cautiously optimistic about their chances to succeed in the current era of doom and gloom. As job losses mount and large companies continue to send jobs overseas in a bid to cut costs, this is a good time for those small business ideas in the back of your mind to emerge and take concrete shape. With the advent of the internet, online marketing has become both cheap and accessible, making it an ideal time to join the ranks of the 29.6 million small businesses active in the US in 2008. In fact, e-commerce is among the hottest small business ideas out there.

The small business

Well in the 21^st century, almost anything – from jewelry to accessories, food and clothing items – can be traded online. For the online savvy, the internet is an accessible sales channel that provides access to a wide variety of would-be customers irrespective of geographical location, and makes it easier for small business entrepreneurs to tap niche markets and otherwise elusive customer segments. Some other examples of small business ideas that might help you jump-start your own private initiative include small brick-and-mortar stores, restaurants, small-scale manufacturing facilities or photographic studios.

Inevitably, the small companies – whether existing or prospective – also face an array of difficulties, whether connected to their limited assets (under-capitalization comes to mind here) or else stemming from small business administration difficulties (that is, poor planning). One issue that appears constantly is that due to their limited size, small firms have limited cushions of retained earnings, inevitably smaller than those of large companies. Also, one aspect which may significantly contribute to the success of such a private initiative – namely, the fact that small businesses cater to specific market demands – can also prove a company’s undoing. How so? Well, a company which operates on a niche market channel inevitably depends on a limited (if stable) number of customers. This means that its owners may find it difficult to compartmentalize and spread business risks, since this requires that the company operates across several product lines and geographies. Also, catering to a few, specific customers also makes it more difficult to deal with the after-effects of falling demand.

Admittedly one of the main challenges prospective small business owners face nowadays has to do with obtaining the optimum level of funding a company needs to cover anticipated expenses, insurance costs and contribution margins prominent among them. However, the downturn has left the small businesses facing an unprecedented shortage of bank credits, which means that owners must analyze all their alternatives, including applying for small business loans or else tapping small business grants. According to the US Small Business Administration (SBA), the US government does not currently offer small business grants for the start-up or expansion of such companies. However, at a decentralized level, many US states provide a variety of small business grants to individuals looking to start their own company. This is due to the fact that small business financing incentives constitute a significant part of the economic growth plans developed at state level. Alongside the grants, other incentives may include tax breaks and even subsidized rates on SBA small business loans.

On the whole, a small business venture is a viable option for individuals looking to start a business. One thing to keep in mind is that small businesses have so far ridden the downturn wave a lot more successfully than larger companies. In Germany for example, where over 4 million small businesses currently operate, an industry survey predicts a drop in sales volumes for 2009 of only 2%. A similar survey carried out in the UK by the Federation of Small Business has found that 60% of businesses were performing as well or even better than in the previous year. This is due to the fact that many viable small business ideas involve a high degree of flexibility, which allows the companies in question to adapt faster to evolving customer demands. Also, a lower number of employees and a closer collaboration with the customer base also results in a higher degree of trust built between workers and managers as well as between the company and its clients. Moreover, in recent months, central authorities have stepped in, ordering banks to relax their small business loans criteria and providing credit guarantees for small companies. On the whole, the time is right to take up such an initiative, provided of course that you are willing to face the inevitable challenges that come with learning to fend for oneself in the current economic context.