What Is a Small Business and Why Is Small Business So Important?

There are many different views on what is small business, but The Small Business Administration (SBA) defines a small business as a company with fewer than 500 employees, or 1500 if it’s a manufacturing company. Depending on the sector it’s in, a small business as defined by the SBA will not have annual receipts exceeding $21.5 million. There are numerous reasons why small businesses are important to the community, the economy and society as a whole.

Types of Business

What is small business is not necessarily dependent on what types of product or service the company offers. However, small businesses tend to be enterprises, or sole traders, like independent retail outlets, accountants beauty salons, lawyers, restaurants, motels and tradesmen. With the rise of the internet, online businesses have also become common entrepreneurial ventures. In fact, nowadays when people are asked to explain what is small  business, they regularly cite online business as a typical small business. Like the archetypical small business, an average online company doesn’t employ much staff, has low start-up costs and can viably be run from home.


It’s widely agreed that what is small business and what isn’t will depend a lot on how much funding the company has and where that funding comes from. Most small enterprises will start off with access to an amount of money that is at least equal to the sum of the 1st year of the business’ projected revenue and the anticipated expenses. The reason why most small companies will make sure to start with at least this much money is because if the business goes bankrupt as a result of undercapitalization, the owner could be left liable for all of the organization’s debt. Bearing in mind what is small business, the owner of such a venture would  probably struggle to pay off such debt.

There are a number of ways in which new companies can get hold of this level of start-up capital. Many owners of small enterprises finance the venture themselves, through cash, an equity loan on the home or other liquid assets. Apart from self-financing, other sources of funding may include bank loans, private loans from friends or family, personal or retirement savings accounts such as 401(k), business grants, private stock issues, venture capital and angel investors. Although far from ideal, credit card debt is another popular source of financing. Considering what is small business, it comes as no surprise that many small business owners use their consumer credit score.

Business Networks

To find out what is small business, it’s worth checking out the member organizations of local and regional groups such as Independent Business Alliances and Chambers of Commerce. This is because these types of business network are typically populated by small companies that are eager to be part of such advocacy organizations, in order to strengthen their position within the community and the economy. Indeed, the American Independent Business Alliance’s (AMIBA) definition of a local independent enterprise could easily be a description of what is small business. According to the AMIBA, a local independent business has a limited number of outlets and limited geographic range.

Business networks not only advocate on behalf of small business but also often provide marketing support and tools and introduce member organizations to potential suppliers, employees and sales leads. The AMIBA uses public education campaigns to promote the value of locally-owned ventures. As there is considerable debate over what is small business, joining a chamber or alliance may be a good idea just to give a company more credibility as a small business. Just the very mention of the U.S. Chamber of Commerce is closely associated with what is small business. This is because the Chamber regularly runs and promotes small business programs such as Small Business Nation.


When people think of what is small business, they think of companies that struggle and go bust during economic recessions. However, one of the many reasons small companies are so important is because of the role they play during recession. Many individuals who are laid off during tough economic times choose to start their own ventures. This not only reduces unemployment rates by giving these people a source of income, but also creates new customers for B2B suppliers and service providers, helping to stimulate the economy. In time, these new companies grow and, because even what is small business needs staff, end up creating employment opportunities by hiring.


A struggling economy will struggle even more without the creation of new companies. Fortunately, small businesses are amongst the types of enterprise most likely to be set up during an economic downturn or financial crisis. Using its own definition of what is small business, the SBA estimates that more than 1 million small companies were launched during the recession of 1990-1992. Also, in 2011 the business intelligence specialist Dun & Bradstreet released a report stating that during the height of the financial crisis, in 2009 and 2010, the rate of small business creation was higher than it had been for more than a decade.


When patenting experts think about what is small business, they think about innovation. This is because small companies garner 13 to 14 times more patents per employee than large patenting companies. Furthermore, these patents are twice as likely to be among the 1% most cited than the patents from the larger firms. This shows that not only are small businesses extremely willing and able to innovate, but their innovations are useful and of value. As long as there is small business, there will always be innovation in the form of fresh ideas and new products. Thinking about what is small business, one of its defining characteristics is its commitment to innovation.

However people choose to define what is small business, there is no denying that small businesses are extremely important in a number of ways. By pulling together to support these businesses, government, the private sector and consumers will all be benefitting themselves as well as small business. Taking the time to find out more about what is small business will help any individual or organization in assisting such companies to do great things for the world.