Types of Small Business

Small business means different things to different people. For the sake of simplicity, in this report we’ll usually use the term “small businesses” to refer to the following segments:

Two major classifications used in this report:

1.    Microbusiness: Basic financial needs, such as Quicken support, simple invoicing,
credit card processing, bill payment, home equity credit lines, and tax reporting; usually sole proprietorships, partnerships, or S-corps (includes self-employed); often with less than 20 employees; total revenue of $50,000 to $1 million annually; total credit lines of less than $250,000.

2.    Small Business: More complex financial needs, such as accounting support, invoicing, payment processing, bill payment, commercial credit lines, tax reporting, and internal security and fraud controls; less than 500 employees; total revenue of $1 to 10 million annually; total credit lines more than $250,000.

Other business types included in above classifications:

·      In-formation Business: Initially, may be more interested in advice and information on credit, payment processing, and other banking services; depending on many factors, may move rapidly towards launch and need to quickly establish accounts and line up financing. Financial needs vary depending on the business plan and funding.

·      SOHO (small office, home office): Smaller, work-from-home sole proprietorships. It can also be used to describe mobile workers such as home-based salespeople in insurance and manufacturing. We classify these companies as microbusinesses.

·      Self-employed: Persons who primarily work for themselves, either as contractors, consultants, or commission-based sales reps. We classify these individuals as microbusinesses.

·      SMB/SME (small and medium business/enterprise): Usually refers to the largest segment of “small” businesses, companies with at least several million in annual revenues. We classify these companies as small businesses.

Primary Data Source

The primary data source for this report is TNS Financial Services Group (formerly NFO WorldGroup-Financial Services, and before that, PSI Global). Our thanks to EVP Maria Erickson and her staff for answering our questions and making data from their Small Business and SOHO studies available. For more information on purchasing financial services research contact Ms. Erickson at (813) 227-8562.

The Small Business and the Affluent Entrepreneur 2003 Study was fielded between April and May 2003; the owners of 3000 U. S.-based small businesses with annual sales between $500,000 and
$10 million were contacted by telephone or mail to provide the most accurate and reliable
information possible.

Using the same methodology, 900 small businesses were contacted for the SOHO and the Entrepreneur Study 2002 between September and October 2002.

 

The big picture in small business

Small businesses exist in all markets, in every town and at every crossing. Using a broad definition that includes smaller part-time business endeavors, there are more than 20 million businesses in the United States, one of every five households. And that understates the market potential. If you also include the personal product usage of the “business-owning” segment, the total could be as much as 50% of your revenues.

Depending on the definition, as many as 30 million business entities exist in the United States, including self-employed or part-time sideline businesses such as selling collectibles on eBay, or as few as 1.2 million if you only look at companies with at least $1 million in annual revenues
. For the purposes of this report, we are defining the total small business market as 23 million, a figure taken from U.S. Small Business Administration statistics¹.

The total includes

·         16 million self-employed/contractors

·         6.0 million microbusinesses with revenues less than $1 million

·         1.3 million of that is the larger small business with revenues of $1 to $10 million

Small businesses account for:

·         99% of all employers

·         51% of private sector employment

·         67% of net new jobs

·         52% of U.S. gross domestic product

Furthermore:

·         600,000 new businesses are started each year¹

·         13% of U.S. households own privately held businesses²

·         Business-owning households had higher income, more education, significantly higher net worth, and were led by individuals in the prime age group 35-60²

·         Boeing Employees Credit Union’s recent survey showed that 50,000 of its 350,000 (14%) members reported owning businesses or being key decision-makers in one³

·         IDC reports there are now 15 million U.S. home-based businesses, 10 million full-time and
5 million part-time⁴

·         More than 400,000 people make most or all of their living from selling on eBay⁵

(1)     SBA Research Summary #211, “Small Business Share of Economic Growth,” Jan. 2002

(2)     George W. Haynes, Assistant Professor at Montana State, and Charles Ou, SBA Economist, presented an Advocacy Working Paper at the Conference of Entrepreneurial and Financial Research in April 2002

(3)     American Banker, 4/13/04

(4)     2004 estimates from IDC as cited in The Wall Street Journal, 6/17/2004

(5)     Estimate from AuctionDrop, a company that earns commissions selling merchandise on consignment through Ebay, as cited in The Wall Street Journal, 6/17/2004

 

Who wants to be a microbusiness?

 

Table 3 Number of U.S. Home-based Businesses Type Number Change 2004 vs. 1999 2004 1999 Number % Full-time 9.9 million 9.6 million +300,000 +3.1% Part-time 5.2 million 6.9 million (1.7 million) (32%) Total 15.1 million 16.5 million (1.4 million) (8.5%) Source: IDC, as cited in The Wall Street Journal, 6/17/04

Everyone it seems. While American attitudes towards big business have declined markedly during the past four years thanks scandals at Enron, MCI, and others, the small business remains on a pedestal. Its human nature to root for the underdog, and the smaller the business the bigger their perceived disadvantage.  

As you plan your business offerings, keep in mind that a majority of Americans aspire to run their own business; fully two-thirds (67%) profess a longing to be in business for themselves. And thanks to computers and the Internet, there are 15 million home-based businesses in the U.S., 400,000 of which make their living from selling on eBay. Surprisingly, though, the number of part-time, home-based businesses has fallen dramatically in the past five years, probably victims of the flat economy
(see Table 3, above).

Since most tax experts recommend separate personal and business transaction accounts for even the smallest business, companion personal/business checking, savings, and card products can be a lucrative niche for financial institutions. Once you’ve convinced retail households running businesses from home to add a business transaction account, you can cross-sell credit and accounting services as the businesses grow.

Channel Preferences

 

Table 4 Primary Banking Channel Among Businesses using Online Financial Services Traditional 16% Online banking 33% Equal mix 51% Total 100% Source: Gartner G2, 2002

When it comes to financial matters, small businesses want it all, every channel, all the time, at the lowest cost. Even among online business banking users, only one-third say that the online channel is primary
(see Table 4, right). Although businesses may want it all, they often do not have the resources or inclination to shop aggressively for the lowest-cost source. The smaller the business, the likelier it is the principal or a spouse handles banking matters. And these owners are unlikely to make it a priority to wring every last dollar out of the cost of their financial services. The story is quite different if the business has a dedicated bookkeeper or financial manager on staff. This person may have both the time and motivation to comparison shop; it’s a feather in their cap if they find cost savings. So you may want to segment your business customers, not
on total revenues, but on whether the owner handles the banking. And shower special
attention on staffers hired to handle the
business’s financial affairs.  

 

 

Table 5

Number of U.S. Small Businesses by Annual Revenues

Source: TNS Financial Services Group, Small Business data 4/03, SOHO/Entrepreneur data 10/02, updated to year-end 2003 by Online Banking Report, +/- 20%

 

Table 6

U.S. Businesses Entities by Annual Revenues
not including self-employed/contractors

Source: TNS Financial Small Business Market Study 2002, 4/03 (commercial banking numbers from 4/00); updated to year-end 2003 by Online Banking Report, =/- 20%

¹The person at the company that handles the majority of banking activities

²Could be serviced by commercial banking department depending on circumstances

 

Table 7

U.S. Small, Micro, and Self-Employed Businesses Using Online Banking and/or Bill Pay

millions, n = 23 million (2003)

Source: Online Banking Report estimates 6/04; accuracy estimated at plus or minus 30% U.S.
All = All small businesses including self-employed, n = 23 million (2002)
Larger = Small and microbusinesses with annual revenues between $50,000 and $10 million, not including self-employed and contractors, n = 7.3 million (2003)

Table 8

Annual Growth Rate of Small, Micro and Self-Employed Businesses Using Online Banking

millions of net new U.S. small business online banking users and percent change from previous year

&

Source: Online Banking Report estimates, 6/04; accuracy estimated at plus or minus 30%