Angels and Venture Capitalists

AuthorJoanie Sompayrac
Pages9-11

Page 9

SMALL BUSINESS FINANCE

The United States Small Business Administration (SBA) estimates that, as of 2003, there were approximately 23.7 million small businesses in the United States. The SBA defines a small business as "an independent business having fewer than 500 employees." Small businesses represent over 99 percent of all employers, and they employ more than half of all private sector employees. Moreover, small businesses employ about 40 percent of all high-tech personnel such as scientists, computer workers and engineers. These firms create anywhere from 60 percent to 80 percent of net new jobs each year, and they represent 97 percent of all exporters of goods. Small business create more than 50 percent of the private gross domestic product, and they pay about 45 percent of the total United States private payroll.

Clearly, small businesses play an important role in our business economy. It is important to note, however, that two-thirds of new small businesses survive at least two years, and about half survive at least four years. Owners of about one-third of the firms that closed said that their firm was successful at closure. Major factors contributing to a firm's success include an ample supply of capital, the fact that a firm is large enough to have employees, the owner's higher level of education, and the owner's reason for starting the firm

Page 10

in the first place, such as freedom for family life or wanting to be one's own boss.

As noted above, a firm's supply of capital is often a major factor in the firm's ability to survive. Consequently, business owners place a substantial emphasis on finding sources of funding for their business. Capital is typically defined as any asset that can be used to generate resources for the business. Capital for most businesses is generally comprised of some combination of cash, inventory and fixed assets.

PLANNING FOR A FIRM'S CAPITAL NEEDS

When starting a business, business owners typically need three types of capital—working capital, fixed capital and expansion capital. Working capital supports a business' short-term operations, and it represents a business' short-term source of funds. It may be used to purchase inventory, pay bills, or take care of other unexpected emergencies. Fixed capital represents those funds that a business...

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