Summarythan larger ones. Similarly this is likely to be caused by relative bargaining power. Small
businesses, typically buying in fairly small quantities, are likely to have to accept the
payment conditions imposed by sellers or face the prospect of not being supplied at all.The significantly higher levels of inventories and trade receivables, combined with
lower trade payables levels, means that the average small business has a much higher
working capital requirement for its size than does its larger counterpart. This factor
alone is a likely contributor to the high failure rate of small businesses, mentioned ear-
lier in this chapter. It is a failure of liquidity that leads to business failure.Small businesses are important
lProvide a significant amount of employment, value added, sales turnover and
capital investment in the UK.
lTend to be innovative.
lSector seems set to grow.Small business failure
lHigh rate of failure.
lMore than half do not survive the first four years of life.Differences between small businesses and larger ones
lCan be more focused regarding pursuit of objectives.
lTend to be private limited companies.
lTend to be taxed at lower rates.
lTend to use the more sophisticated, more theoretically correct (discounting)
approaches to investment appraisal less than larger ones, but tend to use the
less theoretically appropriate ones more.
lTend to be more risky, partly because shareholders tend not to be well
diversified.
lInternal diversification more logical than with larger businesses.
lLower tax rates and higher bankruptcy risk tend to make capital gearing less
attractive.
lDirectors can tailor dividend policy to shareholders more effectively.Small business financing
lTends to be difficult for small businesses to raise equity finance except from
retained profit and their existing shareholders.
lMost potential equity investors will not invest where there is no exit route,
that is, no way to liquidate their shares when they wish.
lPossible exit routes for an equity investor:
lBusiness buys back the shares – requires that it has the cash available at
some future point.Summary
‘