Challenges faced by Small-Scale Entrepreneurs

by Krishna on January 12, 2007

This is the Wal-Mart Age — big-box retail chains with huge inventories and even bigger sales. Yet small mom-and-pop stores still exist. Many shops continue to be founded for different reasons — necessity, hobby, enthusiast, entrepreneurial drive, etc. If you are thinking of starting one, here are some of the challenges faced by small-scale entrepreneurs today. (I will discuss some solutions in a later blog, but first the issues.)

  1. Mega Businesses: The advent of much bigger competition, especially regional and national chains, into the same geographical area as the small businesses poses an immediate threat to the small business. With deeper pockets of money, they can outspend the smaller businesses in every aspect of their business and still charge lesser for their products.

    Big businesses control the entire supply chain and they can manipulate it to meet the customer needs dynamically. They also leverage high-end technology to keep costs under control in a way that cannot be emulated by the small-scale businesses. They also have several partnerships which allow them to bundle a wide variety of products and services for their customers.

  2. Finding and retaining qualified workers: Small-scale businesses cannot pay the level of wages or benefits that can be offered by large-scale businesses (not that the wages offered by Wal-Mart-style companies are anything to die for). Another key factor is the visibility of the organization. With the death of the patriarchic organization that supported a life-long employment, employees are looking at employers to provide life-long employability. A smaller organization is unable to provide the depth of knowledge or experience that will enable an employee to make a major transition into another company or business entity easily.Hence most small businesses find it much more difficult to hire and retain skilled workers. They have to look for employees within a reduced pool of candidates, some of whom may be transient. Many small-scale businesses rely on family members to fill some of the roles.

    Lack of skilled employees or the inability to hire them can result in a lot of additional costs in terms of time (and money) spent in recruitment and retraining. When an employee leaves, the new employee must spend a non-trivial amount of time being trained so that he or she can replace the old employee.

  3. Town, state and federal regulations: Every business owner has to comply with a variety of regulations, including obtaining permits and licenses, and health and safety inspections. While necessary for the overall well-being of the community, this poses a burden on the business owner in terms of time and money that could have been spent growing the business. Environmental regulations, workplace rules and the paperwork associated with tax compliance contribute to most of the burden.Although all businesses have to bear the burden of regulations, small businesses are more affected. Research shows that small firms employing less than 20 employees have a higher annual regulatory burden per employee than firms employing more than 500 employees. A disproportionate amount of regulatory work has to be done by the employer and other owners which leaves less time for management that would yield better results for the company.
  4. Economic uncertainty: Many small business owners are at the mercy of economic conditions that they have no control on. This is particularly true in cities and towns dependent on large employers. When such employers decide to lay off hundreds of workers, it adversely affects several small scale businesses that were built around those employers.Recent developments such as globalization have affected small business owners drastically, particularly those manufacturing products that can now be imported at very low cost. Events such as multi-national treaties like the Kyoto environmental treaty, dollar rate fluctuations and new trade blocs happening elsewhere in the world have impact on small businesses affected by the new economic conditions.
  5. Being up-to-date with technology: Small business owners are generally laggards in technology adoption. The primary reason is the high cost of keeping up with the latest technological innovations in the particular industry, especially in the last decade, when the pace of technological advancement has been phenomenal.The major risk with a small business living with outdated technology is that of competition leapfrogging over it and quickly reducing it to oblivion. Also new technology usually brings the promise of reduced costs and/or increased revenue.

    One cannot talk about new technology without mentioning the Internet. Most small businesses are not technically savvy enough to use the Web effectively. They also cannot afford to hire expert site designers to map out a good online strategy. While blogs are becoming more popular, I personally find that even people in IT industries and big companies do not realize their importance yet.

  6. Access to adequate capital: Many small businesses find it very difficult to obtain finance, especially if they are starting up or if they are a relatively new business. Lenders require security for loans and many smaller businesses do not have adequate security to be accepted.Changes in banking organizations, particularly large mergers, have affected lending to small-scale entrepreneurs. During downturns in the economy, the capital crunch grows more severe as banks reduce lending to riskier borrowers, to which category small businesses belong.

{ 1 comment }

RoseCovered Glasses January 13, 2007 at 10:33 am

There are many good points in your article. I would like to supplement them with some information.

For an all-volunteer site, dedicated to small businesses who wish to succeed in federal government contracting, please see the below site:

The federal government will contract in excess of $80B to small businesses in the next fiscal year.

There are over 50 agencies or "Departments" in the federal government. Each of these agencies has a statutory obligation to contract from small business for over 20% of everything it buys.

Contracting officers must file reports annually demonstrating they have fulfilled this requirement. Not fulfilling the requirement can put agency annual funding in jeopardy. Small business has a motivated customer in federal government contracting officers and buyers.

Large business, under federal procurement law, must prepare and submit annual "Small Business Contracting Plans" for approval by the local Defense Contract Management Area Office (DCMAO) nearest their headquarters. These plans must include auditable statistics regarding the previous 12 month period in terms of contracting to small businesses and the goals forecast for the next year.

The federal government can legally terminate a contract in a large business for not meeting small business contracting goals. Approved small business plans must accompany large business contract proposals submitted to federal government agencies.

Small businesses have motivated customers in large business subcontract managers, administrators and buyers.
There are set-aside opportunities available for small entities,veterans, disabled veterans, women and minorities. All it takes is navigating the system, persistance, asking questions, registering, marketing, teaming and working hard.

Small Business America is good at that.

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