Advantages and Disadvantages of Small Businesses

Small businesses are those firms which have a small number of employees, stock turnover, capital employed etc. Every country has its own criteria to separate small businesses from the larger ones. Following are the advantages and disadvantages of small businesses to their owner or operator as well as the economy in which they operate. Appropriate government policies to promote small businesses are also discussed.

Advantages to the Owner

1. There is a relatively small amount of capital needed to start the businesses. This is a very strong point as banks might not be willing to lend large amounts of money to businesses that are new.
2. These businesses are good for those people who have experience in a field but do not have an adequate amount of resources. These resources of production could be land, labour, capital and enterprise. Enterprise is the risk taking ability of the owner.
3. Small businesses give the owner the freedom to choose the way the want to work, e.g. the office hours, when to take breaks during the day or when to take a day off.
4. The entrepreneur has complete right over the profit. He does not have to share it with other, unlike large public limited companies which have to give out the profits to a large number of shareholders in the form of dividends.
5. Entrepreneurs own business motivates him to work harder as he takes all the profits and is responsible for all the loss incurred by the company.

Disadvantages to the Owner

1. Small businesses do not have economies of scale, the ability to cut costs by increasing production. Therefore, their costs might be significantly higher than the other larger businesses.
2. It is often very difficult to raise the capital needed for startups or expansion. Even if the capital is available, there will be high cost e.g. high interest rates from the banks.
3. Due to limited product range offered by the small businesses, they can go bankrupt if there is a decrease in the demand of the only products they offer. For example, if a business produces all very cheap products e.g. bread, honey, tea, then all these products could be classified as inferior goods. Inferior goods’ demand often falls when incomes of consumers rise as they switch to high quality products.
4. It is often very difficult for small businesses to find suitably premises for rent. The rents might be initially very high.

Advantages to the Economy

1.   They provide employment to a very large number of people. In some economies, they employ more than half of the total employees.
2. They act as competitors to larger firms which will help improve their efficiency and lower the prices offered to the consumers.
3. Small firms might come up with very innovative ideas which can lead to mass production of products and exports to foreign markets which has huge advantages for the economy.
4. Most businesses start with being small. Therefore there is an enormous chance that small businesses of today might become the market leaders of tomorrow and provide greater benefits to the economy.

Disadvantages of Small Businesses

 There are hardly any disadvantages of small businesses. However, it could be argued that in order to make small business startup a success, the government often has to interfere which is against the principles of free market and trade liberalization.

Moreover, this interference by the government might not help to establish small businesses.

Government Policies to Help Small Businesses

1. The governments should offer lower amount of corporate taxes for small businesses. Most governments do that.
2. Loans should be provided to these businesses which are free of interest or at very small rates of interest.
3. Grants should be given to small businesses for operating in underdeveloped areas of the country with high unemployment etc.
4. The government should provide them satisfactory level of training so that the owners and employees could work more efficiently to make the business a success.

To conclude, small business are extremely importance for the welfare of those involved directly or indirectly with the business, i.e. the whole economy. Therefore, I recommend that people should start own businesses. Even if they don’t succeed, there will be a great chance of gaining priceless experience from the business.