Small Businesses

Exam code: 7115

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Some entrepreneurs choose for their business to remain small
- In 2021, 98.9% of businesses in the European Union (EU) were classified as small firms with less than 49 employees
- Small businesses dominate some industries, such as hair and beauty, home improvement and childcare services

They offer a personalised service and focus on building relationships with customers (excellent customer service)
They are unable to access financing for expansion
They provide a product that is in a niche market - small market size but potential for high profits
By remaining small they are able to respond quickly to changing customer needs/preferences
Rapid growth can cause diseconomies of scale, which can be avoided by remaining small
A small business owner's goal is satisficing rather than profit maximisation
Conditions in the economy make expanding a business risky at the time
Competition in the market limits opportunities for growth
Business owners may lack the management skills to grow the business

Developments in technology often benefit smaller businesses
The internet offers low-cost access to market for many firms
- Social media allows even the smallest business to achieve an online presence and target specific groups of customers
- Online storefronts such as Amazon Marketplace, Etsy and Ebay provide low-cost distribution options

Advantages	Disadvantages
Small firms often provide highly customised or unique goods and services, which are sold profitably in small quantities at high prices E.g. Pet grooming in the customer's home Personal relationships can be developed with loyal customers, which helps to generate word-of-mouth advertising Smaller firms can respond quickly to changing market conditions such as changes in fashions and trends	Small firms are unlikely to benefit from economies of scale, as the level of output is lower than that of larger firms Access to finance, such as bank loans or trade credit is likely to be limited Recruiting and retaining high-quality staff can be challenging, as wage and non-wage benefits are less competitive than those offered by bigger firms Small business owners may struggle to take holidays or sick leave, as the business relies on their presence to function

Advantages

Disadvantages

Small firms often provide highly customised or unique goods and services, which are sold profitably in small quantities at high prices
- E.g. Pet grooming in the customer's home
Personal relationships can be developed with loyal customers, which helps to generate word-of-mouth advertising
Smaller firms can respond quickly to changing market conditions such as changes in fashions and trends

Small firms are unlikely to benefit from economies of scale, as the level of output is lower than that of larger firms
Access to finance, such as bank loans or trade credit is likely to be limited
Recruiting and retaining high-quality staff can be challenging, as wage and non-wage benefits are less competitive than those offered by bigger firms
Small business owners may struggle to take holidays or sick leave, as the business relies on their presence to function

Why do some businesses remain small?