Small firms (with, say, less than 500 workers) are often faced with the problems of limited capital. This has a number of side-effects. It means first that they are unable to benefit from economies of scale. Bank managers will be less inclined to lend those funds and will charge them higher rates of interest when they do.
People will be prepared to buy shares in well-known companies. They will not want to buy securities of any sort from small unknown companies. Whereas large firms can threaten to withdraw their business, if debts owing to them are not settled on time, they tend to be regrettable slow on paying their own bills.
An engineer may set up a firm using his technical skills as the basis of the business. As the business grows, his defects as a marketing manager, accountant and personnel manager will begin to appear. He cannot be an expert in all sections of the business, nor can he afford to consult his larger competitors.
The small firm is also unlikely to be able to afford sophisticated^ technological equipment such as a mainframe computers or visual display, however useful they might be. Advertising cost spread out over a large number of units may be insignificant, but given a smaller level of output they prove an intolerable burden. Inevitably, television advertising tends to be a resource available only to the larger concerns.
Starting-up Financing
The young businessman must find sources of money that will last until revenue begins to exceed cash outflows. He must be creative in finding start-up funding. New small businesses can start with the businessman's own assets. On top of that, start-up financing may come from friends and relatives. The larger businesses can obtain funds from venture capital investors.
One of the personal assets the businessman can use to raise funds for the business is his home. The value of the home that the owner has paid for is called the owner's equity in the home. By pledging this equity, the homeowner can obtain a second mortgage or a home equity loan.
A businessman can find another source of start-up financing by a life insurance policy. Many policies build up cash surrender value - the money that the policy- holder can borrow at a low interest rate.
Those who need more funds can obtain a variable rate installment loan. It is a personal loan with an interest rate tied to the prime rate or some other index when the index changes the rate changes in the same direction.
Some good sources of start-up funds are family members and friends. Many people can afford to lend at a low interest rate. The lender can share ownership of the business or can become a partner or shareholder in a corporation.
In some cases new companies can obtain cash from venture capital firms. These financial intermediaries specialize in funding ventures with good promise and invest in businesses which generate high profits within five years. Initially venture capital firms invested in high-tech industries, but now other branches enjoy this kind of financial aid, especially those working in the health-care field. The venture capital firms provide seed money to start a new company funds to help the venture grow and gain the market and money to buy out a business.
Small Business in the USA
Not all people who start businesses dream of huge multimillion-dollar corporations with international sales. Many just want to sell things - fruits and vegetables, home appliances, clothes or computers so that they can be «their own bosses». These small businesses are an important part of the economy. Many of them provide needed goods and services in city neighborhood, in small towns or in rural areas, where large companies might not provide adequate service.
Every year hundreds of thousands of Americans start their own businesses. A government agency, the Small Business Administration helps with information, advice, and, sometimes, loans and grants. Many large companies with many stores started as one-store operations.
The Coca-Cola Company, which distributes its soft drinks around the world, began when a pharmacist mixed together the first Coca-Cola drink and began selling in the southern city of Atlanta, Georgia.
Blue jeans, the popular denim trousers known to teenagers around the world, were invented by a poor cloth peddler who sold his first pair to gold miners in California in the 1880s. His company, Levi Strauss, remains one of the largest clothing manufacturers in the United States.
One of the most significant changes in recent decades has been a shift away from the production of goods to the delivery of services as the dominant feature of the American economy. Where once most workers in the United States produced actual goods - from toothpaste to tires - most Americans today work in the sector of the economy that is broadly defined as providing services. Service industries include retail businesses, hotels and restaurants, federal and local government, office administration, banking and finance, and many other types of work. At the same time, as many traditional manufacturing enterprises in the United States decline or grow slowly, new companies spring up that are developing high technology computer, aerospace or biochemical products and services.