What is an SME?

SME is an abbreviation often used in the business world but what does it actually mean? And does it apply to your business? Broadly speaking, the definition of a SME is a business which operates under a certain threshold in terms of revenue and number of employees.

What does SME stand for?

The SME acronym stands for small and medium-sized enterprise. It’s a wide definition meaning different things to different people, and one which covers everything from a home-based micro-business to a medium-sized company with a multi-million pound turnover.

SMEs make up the majority of businesses in the UK - there are an estimated 5.5 million SMEs of which 5.47 million have between 0 and 49 employees.

Occasionally you might hear the acronym SMB used instead which is an abbreviation of small and medium-sized business.

Detailed definition of an SME

If you run a small business with a handful of staff it’s hard to imagine how a manufacturing business, for example, with 250 staff and a £40 million turnover can be considered a small-sized company!

It’s therefore useful to understand what constitutes an SME and how different organisations define it, particularly if you apply for small business funding.

SME definition in the UK

The UK government defines an SME as a business with fewer than 250 employees. A micro business is one with less than 10 employees and a turnover of under €2 million, a small business is under 50 employees and a turnover of less than €10 million and medium is less than 250 employees and a turnover of under €50 million. 

However, a business with 500 employees can still be defined as an SME. The Bank of England and British Bankers Association view it differently again, describing an SME as a business which has less than £25 million annual turnover. The BBA goes further defining a small company as one with a £1 to £2 million turnover.

You might well ask why defining an SME is so important but it has implications in several areas of business:

• When applying for R&D tax relief
• The type of business energy contract you can secure
• When apply for small business loans and grants or government loans and grants
• What annual accounts you need to submit
• Regulatory matters such as pension requirements or GDPR compliance
• Cost of business insurance

Companies Act definition

It’s important to understand how the Companies Act 2006 defines it as well because this will affect how you file your annual accounts.

The Act uses three definitions:

• Micro-entity - Less than ten employees, annual turnover under £632K, balance sheet of less than £316K

• Small company - No more than 50 staff, annual turnover under £6.5 million, balance sheet less than £3.26 million

• Medium-sized company - no more than 250 employees, annual turnover of no more than £29.5 million, balance sheet of £12.9 million or less

SME definition around the world

SME definition in Europe

The EU’s own definition of a SME, which is considered the standard definition, has three categories:

• Micro-enterprises - under ten staff, turnover of less than €2 million or a balance sheet of less than €2 million

• Small enterprises - under 50 staff, turnover of under €10 million or a balance sheet of less than €10 million

• Medium enterprises - under 250 staff and a turnover of €50 million or a balance sheet of less than €43 million

SME definition in the US

In America an SME is one which has fewer than 500 employees. However, companies which mine raw materials like copper ore or nickel can have up to 1,500 staff and still be classified as an SME. At the other end of the scale businesses with under ten staff are specifically classified as small office or home office businesses (SOHO).

SME definition in China and eastern countries

China has a complex system for classifying businesses based on employee numbers, operating revenue and total assets.

Examples of SMEs include businesses with 0-49 employees and an operating revenue of more than $1 million. Chinese property developers will also be considered small if they have assets of between $20 million and $50 million and a turnover between $1 million and $10 million.

In India, businesses in the small enterprise category have investment in equipment and machinery of no more than Rs 10 crore (approx. £950,000). Such businesses must also have a turnover of no more than Rs 50 crore (approx £4.7 million).

What is an example of an SME?

Common examples of SMEs include dentists, hairdressers, restaurants, bars, gyms and online retailers. For example, an independent chain of cafes with 45 staff spread across five sites and turning over £3 million a year would be a small business. Similarly, a home-based Christmas pudding business which employs just two staff and turns over £100,000 each year would also be considered small or micro.

The number of SMEs in the UK

Collectively, SMEs are the economic powerhouse of the UK with more than 99% of British business fitting the description. Of that figure, 96% fulfil the definition of a micro business, employing under ten people.

In 2022, according to government figures, there were an estimated 5.5 million SMEs with under 50 employees, accounting for more than 99% of total business.
Collectively SMEs employed 16.4 million people and were estimated to have turned over £2.1 trillion for the UK economy.

SMEs are diverse both in terms of the products and services they sell and in the workforce that makes them up. A hairdressing salon with just five employees is considered an SME just as much as a mid-sized manufacturing business with 200 staff members.

Square is perfect for SMEs, providing intuitive POS systems and seamless online payment solutions to help businesses as they grow.

Success rates of SMEs

Around 20% of SMEsl fold in their first year, but don’t let that put you off because four out of five are still going strong. The rate drops to around 40% after five years.

While it’s tough running a small or medium-sized business, and Brexit hasn’t helped, it’s also extremely rewarding. With the right software to support you, you can be one of the ones who thrive.

Frequently asked questions

What does SME stand for?

SME stands for small and medium-sized enterprise and applies to businesses up to a certain size.

Definition of an SME company?

SME stands for small and medium-sized enterprise and to fit the description you need to have less than 250 employees and an annual turnover of under €50 million.

What is considered an SME?

Any business which comes under the thresholds set by the EU and the government.