Small Firms

Exam code: 2281

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

In 2015, 98.7% of firms in the European Union were considered to be small firms with less than 49 employees
Some firms start small and will grow into large companies or even multi-national corporations (Amazon started in a garage)
While many firms grow, others do not or they intentionally choose to remain small

Reasons Why Small Firms Exist

Personalised service	Loans	Niche Market
They offer a more personalised service and focus on building relationships with their customers	Small firms are often unable to access finance for expansion	They provide a product that is in a niche market - smaller market size but can be very profitable
Mass markets	Diseconomies of scale	The firms' objective
Many small firms operate in mass markets with low barriers to entry	Rapid growth can cause diseconomies of scale which can be difficult to deal with and so many owners choose to avoid these	Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing)

Small Firms Experience Both Advantages and Disadvantages When Compared With Large Firms

Advantages	Disadvantages
They often provide highly customised goods/services e.g. pet grooming in the customer's home They often create personal relationships with their customers which helps to generate customer loyalty and word-of-mouth advertising They often provide very unique products which are sold in small quantities at high prices - this can be very profitable Smaller firms can respond quickly to changing market conditions	More susceptible to changes in the wider economy than large firms, especially during recessions Less financial resources available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all It is harder to recruit/retain staff as the wage and non-wage benefits are less competitive than those offered by bigger firms Owners may struggle to take a holiday/sick leave as revenue slows/stops coming in when they stop working Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms resulting in lower profit margins

Advantages

Disadvantages

They often provide highly customised goods/services e.g. pet grooming in the customer's home
They often create personal relationships with their customers which helps to generate customer loyalty and word-of-mouth advertising
They often provide very unique products which are sold in small quantities at high prices - this can be very profitable
Smaller firms can respond quickly to changing market conditions

More susceptible to changes in the wider economy than large firms, especially during recessions
Less financial resources available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all
It is harder to recruit/retain staff as the wage and non-wage benefits are less competitive than those offered by bigger firms
Owners may struggle to take a holiday/sick leave as revenue slows/stops coming in when they stop working
Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms resulting in lower profit margins

Reasons Why Small Firms Exist