What is a Small Business?

What is a Small Business?

Small businesses play a significant role in the Australian economy. They are the lifeblood of the national contribution to employment, GDP and growth.

But, many people still do not understand what a small business is and do not know if they fall into this category.

Over 90% of Australian small businesses account for more than 90% of GDP or gross domestic product. Plus, they employ over 40% of the workforce and pay close to 20% of the tax collected by the ATO.

As we all know, a large percentage of small businesses don’t survive the first year, with the size of the company a significant determining factor. Small businesses are incredibly volatile, and most sole business owners are going bust within the first year.

The peaks and troughs for SME’s make it one of the most resilient sectors in Australia, with many successful entrepreneurs emerging each year.

The definition of Small Business in Australia

ASIC tells us that a small business is defined differently by different regulators and laws. A small business can be structured under a company, joint venture, partnership, trust, or sole trader. The Australian Small Business and Family Enterprise Ombudsman estimate that over 2 million small businesses in Australia operate in 2021.

These include:

Small Business ( 0-19 employees ) accounts for 97%

Medium Business ( 20-199 employees ) accounts for 2%

Large Business ( 200+ employees ) accounts for 1%

The ATO’s definition of a small business

The Australian Tax Office defines a small business with a turnover of less than $10 million, which is a considerable chunk of the business community in Australia. It would include trades, many professionals such as lawyers, doctors, accounts, and most of the service industry.

ASIC’s definition of a small business

The Australian Securities and Investment Commission (ASIC) tells us that ‘small proprietary businesses’ falls into two of the three following areas.

  • An annual turnover of less than $25 million
  • Fewer than 50 employees at the end of the financial year
  • Assets valued at less than $12.5 million

 Nano Small Business

There are also small businesses known as Nano Businesses that pay no GST as they fall below the tax threshold of $75,000 to qualify for paying GST. Their average turnover is about $15,000 per year, and are those businesses generally work from home on a very part-time basis.

Business turnover in Australia

The most recent figures from the ABS ( At June 30 2020 ) show there were 2,422,404 actively trading businesses in the Australian economy. And, the following statistics show you the turnover.

  • 93.0% of businesses had a turnover of less than $2 million, which would account for most companies in Australia.
  • 28.4% of businesses had a turnover of less than $50,000.
  • 79.8% of exits had a turnover of less than $200,000.

Problems facing most small Australian Business

Let’s not candy coat it; running a business is hard, especially if you’re a start-up. Following are some of the hurdles small business face daily.

1) Client dependent – they depend on one main client for their income

2) Money management – paying bills and managing cash flow is always a challenge

3) Burn out – working seven days a week to get the business off the ground.

4) Founder dependence – the owner can’t let go of the business and has not set it up to allow managers to take care of day to day decisions.

5) Lack of marketing skills – business owners may have a good idea, product or service, but they lack the marketing skills to promote their business. The digital space, Google and social media has exacerbated this issue.

6) Unable to get finance to grow – many small businesses in Australia struggle to get the financing or commercial business loans needed to expand and grow. Whether it’s a loan for machinery, inventory, tax debts or running the business getting overdraft or line of credit is often impossible for many sole traders without having to jump through hoops. It’s a nightmare and is one reason why so many small, well-intentioned businesses fall over before they even have a chance to get going. Most lenders such as banks require collateral known as secured business loans. They know how to expand the business, they can see the path forward, but they cannot access the funds.

While most lenders do require some form of collateral, the cost of finance is much cheaper using security and you are able to borrow more as a result too. If you are looking for finance, Sparrow Loans provide secured business loans for small businesses. Find out more about our small business loans and get approved within 48 hours.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.