The U.S. Small Business Administration (SBA) defines small businesses as those employing fewer than 500 employees, and many are much smaller than that. In the United States, about a third of small businesses employ fewer than twenty employees. Many thousands of new small businesses are started every year, but few survive. In fact, according to the SBA, one in three falls during the first two years, and only one in two survives beyond five years.

People start small businesses for a variety of reasons, but whatever the particular motivation, certain characteristics make a small business more likely to succeed. Business advisers point to the importance of finding a niche. It is difficult for a small business to compete with the array of products or services a large business can offer. Instead, the small business that has defined what is unique about the product or service it provides has a greater chance of success. A small business can offer customers personalized service and specialized products or knowledge that can be more difficult to find in a large chain store, for example.

Related to the concept of finding a niche is the importance of maintaining a competitive edge. To be successful, a business has to look at what its competitors, whether large or small, are doing and find a way to stay ahead of the game. In addition to offering a specialized product or service, a business that has more efficient production or distribution systems, a better location, or a reputation for excellence in customer service can do well in a competitive market.

Research and planning are vital steps in setting up a small business. It is essential to determine who the potential customers are and the best way to reach them. It is also necessary to develop a sound business plan that, among other things, shows how the business will make a profit and projects the cash flow that will help the business stay afloat.

Naturally, a successful small business starts out with proper financial support. In addition to the costs of starting the business, there are also the costs of running it until it starts turning a profit. Typically, a small business takes one to two years to become profitable. During that time, there are still expenses that have to be met. Rent has to be paid, employees have to be paid their wages, and supplies have to be bought. If plans have not been made for supporting the costs of the business until it brings in a profit, inevitably it will fail.

One important tip is to start small. This allows owners the opportunity to learn little by little without making huge costly mistakes. Working alone in one’s basement during the initial phases of the business, for example, costs a great deal less than renting a space and hiring staff. If the business generates less income than expected or if the market needs to be redefined, the financial losses will be much less if expenses have been kept to a minimum.

About half of private-sector employees in the United States work for small businesses. This number is even greater in other parts of the world. Successful small businesses make important contributions to the economy everywhere.