Chapter Five:

Small Business
Contents:
5.1 Small Scale Industry
5.1.1 Introduction
5.1.2 Objectives of Small Scale Industries
5.1.3 Major Industry Groups in the Small Scale Sector
5.1.4 Characteristics of Small Scale Industries
5.1.5 Features of Small Business Management
5.1.6 Importance of Small Scale Industry
5.2 Concepts of Small Business
5.2.1 Marketing Concepts of Small Business
5.3 Factors Influencing Small Business success
5.4 Key Issues of Small Business Entrepreneurship
5.5 Institutional Set- up for Promotion of Small Scale Industries
5.6 Financing the Small Scale Industries
5.6.1 Types of Capital
5.6.2 Sources of Finance
5.7 Small Business Ideas That Use Skills You Already Have

5.1 Small Scale Industry:

5.1.1 Introduction:

Small businesses are privately owned corporations, partnerships, or sole proprietorships that have fewer
employees and/or less annual revenue than a regular-sized business or corporation.

Businesses are defined as "small" in terms of being able to apply for government support and qualify for
preferential tax policy varies depending on the country and industry.

In general an SME (Small Business Enterprise) is an enterprise with annual revenues, in U.S. dollar terms,
between 10 and 1000 times the mean per capita gross national income (GNI) of the country in which it
operates.

The legal definition of "small business" varies by country and by industry. In addition to number of
employees, methods used to classify small companies include annual sales (turnover), value of assets and
net profit (balance sheet), alone or as a combination of factors.

In the United States, the Small Business Administration establishes small business size standards on an
industry-by-industry basis, but generally specifies a small business as having fewer than 500 employees for
manufacturing businesses and less than $7.5 million in annual receipts for most non-manufacturing
businesses. The definition can vary by circumstance—for example, a small business having fewer than 25
full-time equivalent employees with average annual wages below $50,000 qualifies for a tax credit under
the health care reform bill Patient Protection and Affordable Care Act. By comparison, a medium-sized
business or mid-sized business has fewer than 500 employees.

The European Union generally defines a small business as one that has fewer than fifty employees and
either turnover or balance sheet less than €10 but the European Commission is undertaking a review of
this definition. By comparison, a medium-sized business has fewer than 250 employees and either turnover
less than €50 m. or balance sheet less than €43.

In Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than fifteen
employees. By comparison, a medium-sized business or mid-sized business has fewer than two hundred
employees.

In South Africa, the National Small Business Amendment Act (Act 26 of 2003) defines businesses in a
variety of ways using five categories previously established by the National Small Business Act (Act 102 of
1996), namely, standard industrial sector and subsector classification, size of class, equivalent of paid
employees, turnover and asset value excluding fixed property.

While small businesses can also be classified according to other methods, such as annual revenues,
*shipments, sales, assets, or by annual gross or net revenue or net profits, the number of employees is one
of the most widely used measures.

*Shipment: Goods carried by a large vehicle.

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Small businesses in many countries include service or retail operations such as: small grocery stores,
bakeries or *delicatessens, hairdressers or trades-people (e.g., carpenters, electricians), restaurants, guest
houses, photographers, very small-scale manufacturing, and Internet-related businesses such as web
design and computer programming.
*Delicatessen: A shop selling ready-to-eat food products

Some professionals operate as small businesses, such as lawyers, accountants, dentists and medical
doctors (although these professionals can also work for large organizations or companies).

Small businesses vary a great deal in terms of size, revenues and regulatory authorization, both within a
country and from country to country. Some small businesses, such as a home accounting business, may
only require a business license. On the other hand, other small businesses, such as day cares, retirement
homes and restaurants serving liquor are more heavily regulated, and may require inspection and
certification from various government authorities.

5.1.2 Objectives of Small Scale Industries:

The objectives of small scale industries are:

i. To create more employment opportunities with less investment.

ii. To remove economic backwardness of rural and less developed regions of the economy.
iii. To reduce regional imbalances.
iv. To mobilise and ensure optimum utilisation of unexploited resources of the country.
v. To improve standard of living of people.
vi. To ensure equitable distribution of income and wealth.
vii. To solve unemployment problem.
5.1.3 Major Industry Groups in the Small Scale Sector: The major industry groups in the small scale sector
re are listed below :

S.No. Industry
1 Food Products
2 Chemical & Chemical Products
3 Basic Metal Industries
4 Metal Products
5 Electrical Machinery & Parts
6 Rubber & Plastic Products
7 Machinery & Parts Except Electrical goods
8 Hosiery & Garments - Wood Products
9 Non-metallic Mineral Products
10 Paper Products & Printing
11 Transport Equipments & Parts
12 Leather & Leather Products
13 Miscellaneous Manufacturing Industries
14 Other Services & Products
15 Beverages, Tobacco & Tobacco Products
16 Drugs And Pharmaceuticals
17 Cotton Textiles
18 Wool, Silk, Synthetic Fiber Textiles
19 Jute, Hemp and Mesta Textiles
20 Paints And varnishes etc.,

5.1.4 Characteristics of Small Scale Industries: The most important characteristics of small scale industries
are given below:

1. Labour intensive: SSI is largely labour intensive and therefore, can provide employment to a large
number of people with limited capital.

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2. Economizes use of capital: The capital requirement of small enterprises, in respect of economic
overheads, such as factory buildings, building for workers and transport facilities; are much less than in
large enterprises. By promoting these industries, we can economise capital even in respect of these
overheads.

3. Short *gestation period: SSI has a short gestation period when compared to large seals industries. These
enterprises can thus be profitably promoted to produce consumer goods.

* The conception and development of an idea or plan.

4. Less imports: The large scale industries need big machines, technical knowledge and same raw materials
which have to be imported. All of these require foreign exchange. On the other hand the SSIs do not
require much imported materials and so they do not drain much of our foreign exchange.

5. Helps in decentralisation: The SSIs are favoured as a means of decentralisation and counteracting
urbanisation. Large cities are overcrowded and breed many social evils. A check on the growth of slums,
pollution etc. in such cities is put by developing small enterprises in smaller places away from cities.

6. Leads to Equitable Distribution of Wealth: In case of big industries, the wealth gets concentrated in the
hands of few big industrialists. The growth of SSIs, on the other hand, provides scope for the small
producers to enjoy same lengths. It also raise the income of many people by providing them employment.

5.1.5 Features of Small Business Management: Small-scale businesses display a distinct set of identifying
characteristics that set them apart from their larger competitors.

1. Lower Revenue and Profitability: Small-scale business revenue is generally lower than companies that
operate on a larger scale. Lower revenue does not necessarily translate into lower profitability. Established
small-scale businesses often own their facilities and equipment outright, which, in addition to other
factors, helps to keep costs lower than more leveraged businesses.

2. Few Employees: Small-scale businesses employ smaller teams of employees than companies that
operate on larger scales. The smallest businesses are run entirely by single individuals or small teams. A
larger small-scale business can often get away with employing fewer than one hundred employees,
depending on the business type.

3. Small Market Area: Small-scale businesses serve a much smaller area than corporations or larger private
businesses. The very definition of small-scale prevents these companies from serving areas much larger
than a local area, since growing beyond that would increase the scale of a small business's operations and
push it into a new classification.

4. Sole or Partnership Ownership: Small-scale businesses prefer to organize as sole proprietorships,

partnerships or limited liability companies. These forms of organization provide the greatest degree of
managerial control for company owners, while minimizing the hassle and expense of business operation.

5. Fewer Locations: A small-scale business, by definition, can be found only in a limited area. These
companies are not likely to have sales outlets in multiple states or countries. A large number of small-scale
businesses operate from a single office, retail store or service outlet. It is even possible to run a small
business directly out of your home, without any company facilities.

5.1.6 Importance of Small Scale Industry: The role and importance of small-scale industries is very
significant towards poverty eradication, employment generation, rural development and creating regional
balance in promotion and growth of various development activities. The following are some of the
important role played by small- scale industries in India.

1. Employment generation: The basic problem that is confronting is increasing pressure of population and
to create massive employment opportunities. The problem of unemployment is solved to larger extent by
small-scale industries because small- scale industries are labour intensive in character. They generate huge
number of employment opportunities. Employment generation by this sector has shown a phenomenal
growth. It is a powerful tool of job creation.

2. Mobilisation of resources and entrepreneurial skill: Small-scale industries can mobilize a good amount
of entrepreneurial skill from rural and semi-urban areas and put them into productive use by investing in
small-scale units. Thus, a huge amount of latent resources are being mobilised by the small-scale sector for
the development of the economy.

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3. Equitable distribution of income: Small-scale industries ensures equitable distribution of income and
wealth in the society which is largely characterised by more concentration of income and wealth in the
organised section keeping unorganised sector undeveloped. This is mainly due to the fact that small
industries are widespread as compared to large industries and are having large employment potential.

4. Regional dispersal of industries: There has been massive concentration of industries in large cities.
People migrate from rural and semi urban areas to these highly developed centres in search of
employment and sometimes to earn a better living which ultimately leads to many evil consequences of
over-crowding, pollution, creation of slums, etc. This problem is better solved by small- scale industries
which utilise local resources and brings about dispersion of industries in the various parts of the country
thus promotes balanced regional development.

5. Provides opportunities for development of technology: Small-scale industries have tremendous

capacity to generate or absorb innovations. They provide ample opportunities for the development of
technology and technology in return, creates an environment conducive to the development of small units.
The entrepreneurs of small units play a strategic role in commercialising new inventions and products. It
also facilitates the transfer of technology from one to the other. As a result, the economy reaps the benefit
of improved technology.

6. Promotes exports: Small-scale industries the source of export marketing. Thus they help in increasing
the country's foreign exchange.

7. Supports the growth of large industries: The small-scale industries play an important role in assisting
bigger industries and projects so that the planned activity of development work is timely attended. They
support the growth of large industries by providing, components, accessories and semi finished goods
required by them. In fact, small industries can breath vitality into the life of large industries.

5.2 Concepts of Small Business: The concepts of small business, self-employment, entrepreneurship, and
startup overlap to certain degree but also carry important distinctions. These four concepts often conflated
with each other.

Below are the key differences of the concepts of small business:

1. Self-employment: An organization created with the primarily intention to give a job to the founders, i.e.
sole proprietor operations.

2. Entrepreneurship: Entrepreneurship is the act of setting out on your own and starting a business instead
of working for someone else in his business.

3. Startup: When big firms are established, they are known as startups, but not all small businesses are
startups that aim to become bigger. Startups aim for growth and often offer an innovative product, process
or service, and the entrepreneurs of startups typically aim to scale up the company by adding employees,
seeking international sales, and so on. Startups refer to new businesses that intend to grow beyond the
founders, to have employees, and grow large.

4. Small business: An organization that is small (few employees) and may or may not have the intention to
be bigger.

Many small businesses are sole proprietor operations consisting solely of the owner, but small businesses
can have a small number of employees.

Many of these small businesses offer an existing product, process or service, and they do not aim at
growth.

5.2.1 Marketing Concepts of Small Business: There are many marketing concepts for small business
marketing to consider and plan for, small business marketing.

Marketing Concept # 1: Planning: Planning is the most vital part of small business marketing or any level of
marketing. Put the time into planning, budget, and other concepts presented here to ensure success.

Marketing Concept # 2: Strategy: Strategy immediately follows planning because the strategy is the
foundation for the rest of the marketing activities. In the process of planning, one must develop the
strategy by target the quality product with reasonable cost.

Marketing Concept # 3: Target Market: Target market is also another key concept for small business
marketing. Targeting allows small business owners to focus on specific customers and reduce marketing

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waste. A well-defined target market will make every other marketing concept so much easier to implement
successfully.

Marketing Concept # 4: Budget: Budgeting is important throughout the entire process. Creating a
marketing budget is usually the hardest and most inaccurate part of small business marketing. Most small
businesses owners lack a great deal of experience in marketing, so their budgets usually control the finance
aspects. The most important part of this marketing concept is to actually establish a marketing budget and
distribute the available funds for reasonable cost.

Marketing Concept # 5: Marketing Mix: The marketing mix is usually defined as product, pricing, place,
and promotion. The small business owner, specifically decide on the products (or services), the appropriate
pricing, where and how to distribute the products, and how will let everyone know about the company and
products.

Marketing Concept # 6: Website: In today’s market, a business of any size must have a website.
Customers, use to search the web over usually for many times before making any purchasing decisions.
This marketing concept contains website should be periodically updated.

Marketing Concept # 7: Branding: Branding consists of the pictures, logo, design scheme, layout, make up,
and image of the products. Branding is how the customers perceive the products and company. Make sure
to pay special attention to what kind of brand are building through each step of the planning and
implementation.

Marketing Concept # 8: Promotion and Advertising: Once the eight marketing concepts, covered target
market is to know about the company and the products. Proper promotion and advertising will result in
effective brand recognition, and, ultimately, increased sales.

Marketing Concept # 9: Customer Relationship Management (CRM): The concept of customer

relationship management has become a huge industry in the marketing world. Maintaining proper
customer relationship management is essential to creating loyal and consistent customers.

5.3 Factors Influencing Small Business Success:

1. Interest: The first factor for entrepreneurial success is interest. Since entrepreneurship pays off
according to performance rather than time spent on a particular effort, an entrepreneur must work in an
area of interests . This interest must also translate into a vision for the company's growth. Even if the day-
to-day activities of a business are interesting to an entrepreneur, this is not enough for success unless to
turn this interest into a vision of growth and expansion.

2. Skill: An entrepreneur must be able to wear many hats and do so effectively. For instance, if he wants to
start a business that creates mobile games, he should have specialized knowledge in mobile technology,
the gaming industry, game design, mobile app marketing or programming.

3. Investment: This investment may be something less tangible, such as the time spends or the skills or
reputation brings, but it also tends to involve a significant investment of assets with a clear value, whether
they be cash, real estate or intellectual property. An entrepreneur who will not or cannot invest in the
company cannot expect others to do so and cannot expect it to succeed.

4. Organization and Delegation: Entrepreneurship requires extensive organization and delegation of tasks.
It is important for entrepreneurs to pay close attention to everything that goes on in their companies, but
if they want their companies to succeed, they must learn to hire the right people for the right jobs and let
them do their jobs with minimal interference from management.

5. Risk and Rewards: Entrepreneurship requires risk. The measurement of this risk equates to the amount
of time and money you invest into your business. However, this risk also tends to relate directly to the
rewards involved. An entrepreneur who undertakes groundbreaking innovations risks everything on an
assumption that something revolutionary will work in the market. If such a revolutionary is wrong, she can
lose everything. However, if she is right, she can suddenly become extremely wealthy.

5.4 Key Issues of Small Business Entrepreneurship: Following are the key issues of Small Business.

1. Simpler operation: Many small businesses can be started at a low cost and on a part-time basis, while a
person continues a regular job with an employer or provides care for family members in the home. In
developing countries, many small businesses are sole-proprietor operations such as selling produce at a
market stall or preparing hot food to sell on the street, that provide a small income.
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Small business is also well suited to Internet marketing; because, it can easily serve specialized niches.
Internet marketing gives small businesses the ability to market with smaller budgets. Small businesses can
respond to changing marketplace demand more quickly. Small business proprietors tend to be in closer
personal contact with their customers and clients than large corporations, as small business owners see
their customers in person each week.

Independence is another advantage of owning a small business. A small business owner does not have to
report to a supervisor or manager. In addition, many people desire to make their own decisions, take their
own risks, and reap the rewards of their efforts. However, entrepreneurs have to work for very long hours
and understand that ultimately their customers are their bosses.

2. *Bankruptcy: Small businesses frequent cause of bankruptcy is under capitalization. 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 the anticipated expenses.

For example, if the prospective owner thinks that he or she will generate $100,000 in revenues in the first
year with $150,000 in start-up expenses, then he or she should have not less than $250,000 available.
Start-up expenses are often grossly underestimated adding to the burden of the business. Failure to
provide this level of funding for the company could leave the owner liable for all of the company's debt
should he or she end up in bankruptcy court, under the theory of under capitalization.

In addition to ensuring that the business has enough capital, the small business owner must also be
mindful of contribution margin (sales minus variable costs). To break even, the business must be able to
reach a level of sales where the contribution margin equals fixed costs. When they first start out, many
small business owners under price their products to a point where even at their maximum capacity, it
would be impossible to break even. Cost controls or price increases often resolve this problem.

*Bankruptcy: A state of complete lack of some abstract property/ Inability to discharge all your debts as they come
due

3. Social responsibility: Owners of small businesses often participate heavily in the day-to-day operations
of their companies. This results in a lack of time for the owner to coordinate socially responsible efforts,
such as supporting local charities or not-for-profit activities. Furthermore, small businesses undergo stress
from shareholder expectations. Because small businesses have more personal relationships with their
patrons and local shareholders, they must also be prepared to withstand closer scrutiny if they want to
share in the benefits of committing to socially responsible practices or not.

4. Job quality: Many small businesses struggle or are unable to provide employees with benefits they
would be given at larger firms. Employees of large firms are more likely to receive benefits including salary,
paid leave, paid holidays, bonuses, insurance, and retirement plans. Both lower wages and fewer benefits
combine to create a high job turnover rate among small businesses that correspondingly higher than large
firms.

5. Marketing: Although small businesses have close relationships with their existing customers, finding
new customers and reaching new markets is a major challenge for small business owners. Small businesses
typically find themselves strapped for time to do marketing, as they have to run the day-to-day aspects of
the business. To create a continual stream of new business and find new clients and customers, they must
work on marketing their business continuously. Low sales (result of poor marketing) is one of the major
reasons of small business failure.

Common marketing techniques for small business include business networking (e.g., attending Chamber of
Commerce events or trade fairs), "word of mouth" promotion by existing customers, customer referrals,
Yellow pages directories, television, radio, and outdoor ads (e.g., roadside billboards), print ads, and
Internet marketing. TV ads can be quite expensive, so they are normally intended to create awareness of a
product or service.

Social media has proven to be very useful in gaining additional exposure for many small businesses. Many
small business owners use Facebook and Twitter as a way to reach out to their loyal customers to give
them news about specials of the day or special coupons, generate repeat business and reach out to new
potential clients. The relational nature of social media, along with its immediacy and twenty-four-hour
presence lend intimacy to the relationships small businesses can have with their customers, while making it
more efficient for them to communicate with greater numbers. Facebook ads are also a very cost-effective
way for small businesses owners to reach a targeted audience with a very specific message.

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Marketing Plan:

 Market Research – To produce a marketing plan for small businesses, research needs to be done
on similar businesses, which should include desk research (done online or with directories) and
field research. This gives an insight in the target group’s behavior and shopping patterns. Analyzing
the competitor’s marketing strategies makes it easier for small business to gain market share.
 *Marketing Mix – Marketing mix is a crucial factor for any business to be successful. Especially for
a small business, examining a competitor’s marketing mix can be very helpful. An appropriate
market mix, which uses different types of marketing, can help to boost sales.
 Promotion Techniques – It is preferable to keep promotion expenses as low as possible. ‘Word of
mouth’, ‘email marketing’, ‘print-ads’ in local newspapers etc. can be effective.
 Channels of Distribution – Selecting an effective channel of distribution may reduce the
promotional expenses as well as overall expenses for a small business.
 **Product Life Cycle – After the launch of the business, crucial points of focus should be the
growth phase (adding customers, adding products or services, and/or expanding to new markets)
and working towards the maturity phase. Once the business reaches maturity stage, an extension
strategy should be in place. Re-launching is also an option at this stage. Pricing strategy should be
flexible and based on the different stages of the product life cycle.

*Marketing Mix: Marketing mix refers to four broad levels of marketing decision, namely: product, price, promotion,
and place.
**Product Life Cycle: Introduction, Growth, Maturity, Decline.

5.5 Institutional Set-up for Promotion of Small Scale Industries (Role of Government in Promoting Small
Business): Following are steps taken by government in promoting small business.

1. Monetary grants
2. Economic Development
3. Loans
4. Research and Development
5. Infrastructure Improvement
6. Education and Training

1. Monetary grants: Municipalities, counties, states and the federal government all offer direct and
indirect assistance to individual businesses and industries through a variety of monetary grants, paid
research, and worker training.

2. Economic Development: Governments offering start-up incentives and taking steps to create a
“business-friendly” environment. These steps include worker training, cheaper land, zoning changes,
infrastructure improvements and help with fast-tracking licensing and permitting.

3. Loans: Government agencies provide loan guarantees to small business, encouraging local banks to work
with start-ups or area business that wish to expand. Banks offer low interest rates or target women,
minorities or businesses in specific industries.

4. Research and Development: The federal government provides grants to academic institutions working
to develop new technologies that will benefit industry, with the caveat and the institutions share the
technologies with industry. In some instances, the government provides grants to private companies
making a new product or service that will improve a vital area of an economy, such as transportation,
energy, agriculture or communications. Some states also fund research and development projects, to
encourage innovation in product and service.

5. Infrastructure Improvement: Business does better when it can move raw materials to factories
efficiently and get finished goods to plants and markets quickly. Governments help improve the
infrastructure needed for businesses to thrive that would be too costly for any one business to fund. This
includes building and maintaining roads, bridges, rail lines, airports, seaports, energy transmission lines and
telecommunications systems.

6. Education and Training: To ensure businesses have access to trained workers, governments provide free
schooling for primary and secondary students, grants and loans for higher education and worker training
programs. Governments often work with trade schools, community colleges and universities to provide
free worker training.

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5.6 Financing the Small Scale Industries:
5.6.1 Types of capital: Entrepreneurs need the following different types of capital:

1. Fixed Capital: Fixed capital is needed to purchase a company's permanent or fixed assets such as
buildings, land , computers, and equipments. Money invested in these fixed assets tends to be frozen
because it cannot be used for any other purpose. Typically, large sums of money are involved in purchasing
fixed assets, and credit terms usually are lengthy. Lenders of fixed capital expect the asset purchased to
improve the efficiency and, thus, the profitability of the business and to create improved cash flow that
ensures repayment.

2. Working Capital: Working capital represents a business's temporary funds; it is the capital used to
support a company's normal short-term operations. Accountants define working capital as current
assets minus current liabilities. The need for working capital arises because of the uneven flow of cash
into and out of the business due to normal seasonal fluctuations. Credit sales, seasonal sales swings, or
un foreseeable changes in demand will create fluctuations in any small company's cash flow. Working
capital normally is used to buy inventory, pay bills , finance credit sales, pay wages and salaries, and take
care of any unexpected emergencies.

3. Growth Capital: Growth capital, unlike working capital, is not related to the seasonal fluctuations of a
small business. Instead, growth capital requirements surface when an existing business is expanding or
changing its primary direction. For example, a small manufacturer of silicon chips for computers saw his
business skyrocket in a short time period. With orders for chips rushing in, the growing business needed a
sizable cash infusion to increase plant size, expand its sales and production workforce, and buy more
equipment. During times of such rapid expansion, a growing company's capital requirements are similar to
those of a business start -up. Like lenders of fixed capital, growth capital lenders expect the funds to
improve a company's profitability and cash flow position, thus ensuring repayment.

4. Equity Capital Versus Debt Capital:

Equity Capital: Equity capital represents the personal investment of the owner (or owners) in a business
and is sometimes called risk capital because these investors assume the primary risk of losing their funds if
the business fails. Entrepreneurs are most likely to give up significant amounts of equity in their businesses
in the start-up phase than in any other. To avoid having to give up majority control of their companies early
on, entrepreneurs should strive to launch their companies with the smallest amount of money possible.

Debt Capital: Debt capital is the financing that a small business owner has borrowed and must repay
with interest. Lenders of capital are more numerous than investors, although small business loans can be
just as difficult (if not more difficult) to obtain. Although borrowed capital allows entrepreneurs to
maintain complete ownership of their businesses, debt capital must be carried as a liability on the balance
sheet as well as be repaid with interest at some point in the future. In addition, because lenders consider
small businesses to be greater risks than bigger corporate customers, they require higher interest rates on
loans to small companies because of the risk-return tradeoff-the higher the risk, the greater is the return
demanded.

5.6.2 Sources of Finance:

5.6.2 .1 Sources of Equity Capital:

1. Retained Earnings: Companies can finance their projects through funds that have been withheld from
previous periods earnings. This is usually referred to the cheapest form of financing.

2. Personal Savings: The first place entrepreneurs should look for start-up money is in their own pockets.
It's the least expensive source of funds available. Entrepreneurs apparently see the benefits of self-
sufficiency; the most common source of equity funds used to start a small business is the entrepreneur's
pool of personal savings.

3. Friends and Family Members: Investments from family and friends are an excellent source of seed
capital and can get a start-up far enough along to attract money from private investors or venture
capital companies. However inherent dangers lurk in family business investments. Unrealistic
expectations or misunderstood risks have destroyed many friendships and have ruined many family re-
unions. To avoid such problems, an entrepreneur must honestly present the investment opportunity and
the nature of the risks involved to avoid alienating friends and family members if the business fails.
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4. "Angels" (private investors): These private investors ("angels") are wealthy individuals, often
entrepreneurs themselves, who invest in business start-ups in exchange for equity stakes in the
companies. Angel investors have provided much-needed capital to entrepreneurs for many years. Some
angels have a personal interest or experience in a particular industry-and they are willing to put money
into companies in the earliest stages long before venture capital firms and institutional investors jump in.

5. Partners: Entrepreneurs can take on partners to expand the capital foundation of a business. Before
entering into any partnership arrangement, however, entrepreneurs must consider the impact of giving up
some personal control over operations and of sharing profits with others. As the founder's ownership in a
company becomes increasingly diluted, the probability of losing control of its future direction and the
entire decision-making process increases.

6. Corporate Venture Capital: Large corporations have gotten into the business of financing small
companies. The right corporate partner may share technical expertise, distribution channels, and
marketing know-how and provide introductions to important customers and suppliers. Another intangible
yet highly important advantage an investment from a large corporate partner give s a small company
is credibility. Doors that otherwise would be closed to a small company magically open when the right
corporation becomes a strategic partner.

7. Public Stock Sale ("Going Public"): In some cases, entrepreneurs can "go public" by selling shares of
stock in their corporations to outside investors. A public offering is an effective method of raising large
amounts of capital.

5.6.2.2 Commercial Banks: Commercial banks are the very heart of the financial market for small
businesses, providing the greatest number and variety of loans to small companies. Banks tend to be
conservative in their lending practices and prefer to make loans to established small businesses rather
than to high-risk start-ups. Bankers want to see evidence of a company's successful track record before
committing to a loan. They are concerned with a firm's operating past and will scrutinize its financial
reports to project its position in the future. They are also want proof of the stability of the company's sales
and about the ability of the product or service to generate adequate cash flows to ensure repayment of
the loan. If they do make loans to a start-up venture, banks like to see sufficient cash flows to repay the
loan, ample collateral to secure it.

5.6.2.3 Non-Bank Sources of Debt Capital:

1. Asset-Based Lenders: Asset-based lenders, which are usually commercial finance companies, or
specialty lenders, allow small businesses to borrow money by *pledging otherwise idle assets such as
accounts receivable, inventory, or purchase orders as collateral. Like banks, asset-based lenders consider in
a company's cash flow, but they are more interested in the quality of the assets pledged as collateral.
The amount a small business can borrow through asset-based lending depends on the advance rate, the
percentage of an asset's value that a lender will lend.

*Pledging: Give as a guarantee.

2. Inventory Financing: Here, a small business loan is secured by its inventory of raw materials, work in
process, and finished goods. If an owner defaults on the loan, the lender can claim the pledged
inventory, sell it, and use the proceeds to satisfy the loan. Because inventory usually is not a highly
liquid asset and its value can be difficult to determine, lenders are willing to lend only a portion of its
worth, usually no more than 50 percent of the inventory 's value . The key to qualifying for inventory
financing is proving that a company has a plan or a process in place to ensure that the inventory
securing the loan sells quickly.

3. *Vendor Financing: Many small companies borrow money from their vendors and suppliers in the form
of trade credit. When banks refuse to lend money to a start-up business because they see it as a high credit
risk, an entrepreneur may be able to turn to trade credit for capital. Essentially, a company receiving trade
credit from a supplier is getting a short-term, interest-free loan for the amount of the goods purchased.

*Vendor: Someone who promotes or exchanges goods or services for money/Wholesaler/Retailer/Dealer.

4. Equipment Suppliers: Some equipment vendors encourage business owners to purchase their
equipment by offering to finance the purchase. Usually, equipment vendors offer reasonable credit terms
with only a modest down payment, with the balance financed over the life of the equipment (often
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several years ). Start-up companies often use trade credit from equipment suppliers to purchase
equipment and fixtures such as counters, display cases, refrigeration units, machinery, and the like.

5.6.2.4 Commercial Finance Companies: When banks denied loans, small business owners often look to
commercial finance companies for the same types of loans. Unlike their conservative counterparts
(commercial banks), they are willing to tolerate more risk in their loan portfolios. Of course, their primary
consideration is collecting their loans, but finance companies tend to rely more on obtaining a security
interest in some type of *collateral, given the higher-risk loans that make up their portfolios.

*Collateral: Security/ Guarantee.

5.6.2.5 Savings and Loan Associations: Savings and loan associations (S&Ls) specialize in loans for real
property. In addition to their traditional role of providing mortgages for personal residences, savings and
loan associations offer financing on commercial and industrial property. The S&L will lend up to 80
percent of the property's value with a repayment schedule of up to 30 years.

5.6.2.6 Stock Brokerage Houses: Stockbrokers also make loans to their customers. These margin loans
carry lower rates because the collateral supporting them the stocks and bonds in the customer's portfolio
is of high quality and is highly liquid. Moreover, brokerage firms make it easy to borrow. Typically. there is
no fixed repayment schedule for a margin loan; the debt can remain outstanding indefinitely as long as the
market value of the borrower's portfolio of collateral meets minimum requirements. There is risk involved
in using stocks and bonds as collateral on a loan. Brokers typically require a 30 percent *cushion on margin
loans. If the value of the borrower's portfolio drops, the broker can make a margin (maintenance) call-that
is, the broker can call the loan in and require the borrower to provide more cash and securities as
collateral.

*Cushion: Protect from impact.

5.6.2.7 Insurance Companies: Insurance companies offer two basic types of loans known as: Policy loans
and *Mortgage loans.

Policy loans are extended on the basis of the amount of money paid through premiums into the insurance
policy. It usually takes about two years for an insurance policy to accumulate enough cash surrender value
to justify a loan against it. Once he or she accumulates cash value in a policy, an entrepreneur may borrow
up to 95 percent of that value for any length of time. Interest is levied annually, but borrowers can defer
repayment indefinitely. However , the amount of insurance coverage is reduced by the amount of the loan.
Policy loans typically offer very favorable interest rates, often at or below prevailing loan rates at banks
and other lending institutions.

Mortgage loans make on a long-term basis on real property worth. They are based primarily on the value
of the real property being purchased. The insurance company will extend a loan of up to 75 or 80 percent
of the real estate 's value and will allow a lengthy repayment schedule over 25 or 30 years so that
payments do not strain the firm' s cash flows excessively.

*Mortgage: A conditional conveyance of property as security for the repayment of a loan.

5.6.2.8 Credit Unions: Credit unions don't make loans to just anyone; to qualify for a loan, an entrepreneur
must be a member. Lending practices at credit unions are very much like those at banks, but they usually
are willing to make smaller loans. Entrepreneurs around the globe are turning to credit unions to finance
their businesses, sometimes borrowing tiny amounts of money.

5.6.2.9 *Bonds: Bonds have always been a popular source of debt financing for large companies. Few
small business owners realize that they can also tap this valuable source of capital. Although the smallest
businesses are not viable candidates for issuing bonds, a growing number of small companies are finding
the funding they need through bonds. The bond issuing company must follow the same regulations
that govern businesses selling stock to public investors.

*Bonds: A certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation
in order to raise money; the issuer is required to pay a fixed sum annually until maturity and then a fixed sum to
repay the principal.

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5.6.2.10 Federally (Government) Sponsored Programs (US Based): “Government funding is like the low-
hanging fruit,”!. There are several funding programs being given by government for entertaining the
entrepreneurs particularly developing small scale industries. Following are some of such funding programs
given by government.

1. Economic Development Administration: The Economic Development Administration (EDA), a branch

of the Commerce Department, offers loan guarantees to create new business and to expand existing
businesses in areas with below average income and high unemployment. Focusing on economically
distressed communities, the EDA often works with local governments to finance long-term investment
projects needed to stimulate economic growth and to create jobs by making loan guarantees.

2. Department of Housing and Urban Development: The Department of Housing and Urban Development
(HUD) sponsors several loan programs to assist qualified entrepreneurs in raising needed capital.
Community Development Block Grants (CDBGs) are extended to cities and counties that, in turn, lend or
grant money to entrepreneurs to start small businesses that will strengthen the local economy. Grants are
aimed at cities and towns in need of revitalization and economic stimulation. Some grants are used to
construct buildings and plants to be leased to entrepreneurs, sometimes with an option to buy. No ceilings
or geographic limitations are placed on CDBG loans and grants, but projects must benefit low- and
moderate-income families.

3. Small Business Innovation Research Program: Small Business Innovation Research (SBIR) agencies
award cash grants or long-term contracts to small companies wanting to initiate or to expand their
research and development efforts. SBIR grants give innovative small companies the opportunity to attract
early-stage capital investments without having to give up significant equity stakes or taking on burdensome
levels of debt.

4. The Small Business Technology Transfer Program(STTR): The STTR uses companies to exploit the vast
reservoir of commercially promising ideas that originate in universities, federally funded R&D centers, and
nonprofit research institutions. Researchers at these institutions can join forces with small businesses and
can spin off commercially promising ideas while remaining employed at their research institutions.

5.7 Small Business Ideas That Use Skills You Already Have:

1. If you’re a whiz with numbers:

Start an accounting business: Do you enjoy bookkeeping, preparing taxes, and generally managing money?
Consider starting an accounting business. The field of Strategic Advising is growing, and there is more
demand than ever for accountants to provide services beyond just routine tax prep. Unlike many
suggestions on this list, becoming an accountant and opening your own firm will require the right
education—generally, you’ll need a bachelor’s degree, and you’ll also likely need to be licensed as a CPA.

2. If you’re great at motivating people:

Start a personal training business or open a gym: If you’re into some aspect of fitness, opening a gym or
starting a personal training business could be a great small business idea. From general fitness coaching to
becoming an instructor to personal training, to opening your own gym, there are plenty of options in the
fitness sphere, depending on where your interests lie. After all, the best business ideas for you will be the
ones that play to your strengths.

3. If you’re a strong writer:

Start your own freelance writing business: Sites like Elance and Upwork are great places to get started
freelance writing, and you can easily build a small business around your skills as a freelance writer, or
potentially expand to include other writers (or graphic designers, web designers, and so on) down the
road.

Editing and proofreading services are always needed and would make a great small business idea. You can
begin by taking on freelance work and go from there.

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4. If you have a green thumb:

Start a garden center: If you love gardening, but would rather share your expertise than physically help
others with their personal gardens, starting a garden center might be the right small business idea for you.
You can advise and educate other enthusiasts on what it takes to make their gardens beautiful.

5. If you love to be creative:

Start a photography business: If you’ve got a great eye and are always the one who documents special
moments, you might want to consider making a career out of your photography passion.

While the competition is pretty stiff, specializing in a specific area, such as pet photography, weddings, or
portraits can help set you apart.

6. If you excel at making people feel relaxed and beautiful:

Start a massage therapy business: While it does take licensing to become a massage therapist, starting a
massage therapy business can be a great career for someone who enjoys working with people, and making
them feel relaxed and peaceful, or helping them manage pain or injury.

Like a massage therapist, you will need a license to be a hairstylist, esthetician, or nail technician. However,
if the training sounds enjoyable, consider looking into starting a salon or spa business.

7. If you enjoy helping people:

Start a nonprofit: There are endless ways that you can help others by starting a nonprofit business. What
problem are you passionate about fixing? Starting a nonprofit business can be a rewarding life path, as it
can enable you to both make money and make a difference.

8. If you are a natural teacher:

Start a tutoring business: If you know multiple languages, excelled at a certain subject in school, or are
good at explaining concepts in a way that is easy to understand, consider starting a tutoring business. You
can specialize in a particular area, depending on your skill set, such as paper writing, languages, math, or
test preparation—the list goes on.

Maybe you’re a skilled potter or a trained dancer? Love to practice yoga, and are interested in becoming an
instructor? Whatever your skill, there are likely people who’d love a teacher.

9. If you are impossibly organized:

Start an event planning business: If you get excited over a well-planned itinerary (hey, no judgement—I’m
right there with you), you might want to look into starting an event planning business.

From weddings to parties to corporate events, if you can rise above the competition (which is admittedly
very present), event planning is an ideal small business idea.

10. If you enjoy off-hours, early mornings, or late nights:

A. Start a bar, brewery: If you’re the consummate night owl who enjoys interacting with people, starting a
bar or a club might be a great fit for your personality. No matter where you live, your area is likely full of
bars to begin with—so make sure you do your market research. What is your community missing? What
kind of place would you personally want to hang out in?

B. Start a cafe, bakery, or a coffee shop: On the flip side, do you dream of a job that would leave your
evenings free—and love a good cup of coffee and a pastry? Consider starting a coffee shop, a cafe, or a
bakery. The food and beverage industry, in general, is a bit of a double-edged sword—perpetually popular,
but hard to survive in—so make sure you’ve done your market research and validated your business idea.

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 C. Open a restaurant: There’s no doubt that the restaurant industry is a difficult one to be successful in.
However, if you value a career that is exciting, holds non-standard hours, and lets you fill a need in your
community, opening a restaurant might be right for you—just be prepared to work hard to stand out.

11. If you love caring for others (including four-legged friends):

A. Start a daycare center: If you’re good with children, you’re in luck—childcare is always a needed service.
You also have plenty of options; you could go the full-time nanny route, establish a childcare service out of
your home, or rent commercial space, depending on your goals.

B. Start a doggy daycare, boarding, or pet grooming business: Do you love animals? Was dog walking your
preferred job when you were in high school? Parlay this into a career by starting a pet boarding service, a
daytime doggy daycare, or a pet grooming service.

C. Start a senior citizen assistance business: Do you have a passion for helping the elderly have a better
quality of life? If so, you could start a small business focused on assisting senior citizens.

12. If you’re interested in taking advantage of new business trends:

Start a business in an emerging industry: If you like to be on the cutting edge, consider starting a business
in a new, trending industry. It’s a potentially difficult route to take; there’s less precedent, after all, and the
roads to success are somewhat unpaved, but in many ways that can be considered in a challenging way.

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