Paper 1 Preparation - Small Businesses » Small Business Multiple Choice Practice

Introduction to Small Businesses

Small businesses are the backbone of most economies around the world. In the UK, over 99% of all businesses are classified as small or medium enterprises (SMEs). But what exactly makes a business 'small' and why are they so important? Understanding small businesses is crucial for your iGCSE Business Studies exam, as they feature heavily in Paper 1 multiple choice questions.

Key Definitions:

• Small Business: A business with fewer than 50 employees and limited annual turnover.
• Sole Trader: A business owned and run by one person who takes all profits and losses.
• Partnership: A business owned by 2-20 people who share profits, losses and responsibilities.
• Private Limited Company (Ltd): A business owned by shareholders with limited liability protection.

Types of Small Business Ownership

Small businesses can take several legal forms, each with different advantages and disadvantages. Understanding these structures is essential for Paper 1 success.

Sole Traders

The simplest form of business ownership where one person owns and runs the entire business. Think of your local corner shop owner or a freelance graphic designer working from home.

✅ Advantages

• Easy to set up
• Keep all profits
• Complete control
• Flexible working

❌ Disadvantages

• Unlimited liability
• Hard to raise finance
• Long working hours
• Business dies with owner

💡 Examples

• Plumbers
• Hair stylists
• Corner shops
• Tutors

Partnerships

When 2-20 people join together to run a business, sharing the workload, costs and profits. Many professional services like law firms and accountants operate as partnerships.

✅ Advantages

• Shared workload
• More capital available
• Different skills combined
• Shared decision making

❌ Disadvantages

• Unlimited liability
• Shared profits
• Potential disagreements
• Joint responsibility for debts

💡 Examples

• Law firms
• Dental practices
• Restaurants
• Consultancies

Private Limited Companies

Many successful small businesses eventually become private limited companies (Ltd). This gives them important legal protections whilst remaining relatively small and flexible.

Sources of Finance for Small Businesses

Small businesses often struggle to raise money because they're seen as risky investments. Understanding different finance sources is crucial for exam success.

Internal Sources of Finance

💰 Personal Savings

The owner's own money - most common for start-ups. Shows commitment to lenders and investors.

💳 Retained Profits

Money kept in the business rather than taken out by owners. Only available to established businesses.

💸 Sale of Assets

Selling equipment or property the business no longer needs to raise cash quickly.

External Sources of Finance

🏦 Bank Loans

Fixed amount borrowed with regular repayments plus interest. Requires good credit history and often security.

📊 Overdrafts

Flexible borrowing up to an agreed limit. Good for cash flow problems but expensive long-term.

🤝 Government Grants

Free money for specific purposes like job creation or innovation. Competitive and often have strict conditions.

Challenges Facing Small Businesses

Small businesses face unique challenges that larger companies don't. Understanding these helps explain why many small businesses fail within their first few years.

Advantages of Small Businesses

Despite the challenges, small businesses have several advantages that help them compete and succeed in modern markets.

⚡ Flexibility

Can change quickly to meet customer needs or market changes. No lengthy decision-making processes.

👥 Personal Service

Owners often serve customers directly, building relationships and loyalty that big businesses can't match.

🎯 Niche Markets

Can focus on specific customer groups or products that big businesses ignore as too small.

Paper 1 Multiple Choice Tips

Now you understand small businesses, here are key tips for tackling Paper 1 multiple choice questions successfully: