What Are Small and Mid-size Enterprises (SMEs)?
Small and mid-size enterprises (SMEs) are businesses that maintain revenues, assets or a number of employees below a certain threshold. Each country has its own definition of what constitutes a small and medium-sized enterprise. Certain size criteria must be met and occasionally the industry in which the company operates in is taken into account as well.
- Small and mid-size enterprises (SMEs) are businesses that have revenues, assets, or a number of employees below a certain threshold.
- Each country has its own definition of what constitutes a small and medium-sized enterprise.
- Each country may also set different guidelines across industries to define what a small business is across sectors.
- SMEs play an important role in the economy, employing vast numbers of people and helping to shape innovation.
- Governments regularly offer incentives, including favorable tax treatment and better access to loans, to help keep them in business.
Understanding Small and Mid-size Enterprises (SMEs)
Though small in SMEs play an important role in the economy. They outnumber large firms considerably, employ vast numbers of people and are generally entrepreneurial in nature, helping to shape innovation.
Small and mid-size enterprises can exist in almost any industry, but it is more likely they reside within industries requiring fewer employees and requiring smaller upfront capital investments. Common types of SMEs include legal firms, dentist offices, restaurants, or bars.
SMEs are segregated from large, multi-national companies because they fundamentally operate differently. Large, complex firms may require advanced ERP systems, interconnectivity across offices around the world, or must deeper organizational charges. SMEs, on the other hand, may be more with limits to its upside potential but also with more simple operations.
Small and Mid-Size Enterprises (SMEs) Around the World
SMEs in the U.S.
In the U.S., the Small Business Administration (SBA) classifies small businesses according to its ownership structure, number of employees, earnings and industry. For example, in manufacturing, an SME is a firm with 500 or fewer employees. In contrast, businesses that mine copper ore and nickel ore can have up to 1,500 employees and still be identified as an SME. Like the EU, the U.S. distinctly classifies companies with fewer than 10 employees as a small office/home office (SOHO).
When it comes to tax reporting, the Internal Revenue Service (IRS) does not categorize businesses into SMEs. Instead, it separates small businesses and self-employed individuals into one group and large to mid-size businesses into another. The IRS classifies small businesses as companies with assets of $10 million or less and large businesses as those with over $10 million in assets.
The SBA Office of Advocacy reported over 32.5 million small businesses in the U.S. at the end of 2021. 81% of these companies did not have any employees. Within the United States economy, small business comprise 99.9% of all firms, 99.7% of all firms with paid employees, and 97.4% of exporters.
SMEs are disproportionally owned by white males, highlighting the lack of access to financial and entrepreneurial resources across races and genders. For example, a December 2021 report by the SBA found only 18.3% of employer firms were owned by minorities while only 19.9% of employer firms were owned by women.
SMEs in Canada
The Canadian government has defined Canadian Industry Statistics that dictate what type of company a business is based on the number of employees.
- Micro businesses have 1-4 employees.
- Small businesses have 5-99 employees.
- Medium businesses have 100-499 employees.
- Large businesses have 500+ employees.
In 2021, small businesses comprised 98.1% of all employer businesses in Canada. Small businesses employed over 10 million individuals—more than three times as many individuals employed by medium-sized businesses.
SMEs in the European Union
The European Union (EU) offers definitions of what and isn't a small-sized company as well. Small-sized enterprises are companies with fewer than 50 employees and a medium-sized enterprise as one with less than 250 employees. In addition to small and mid-size companies, there are micro-companies, which employ up to 10 employees.
As is the case in other countries, SMEs represent 99% of all businesses within the European Union. SMEs employ an estimated 100 million individuals and account for more than half of the country's GDP.
SMEs in China
China's system of classifying the size of Chinese companies is complex. In general, companies are defined based on their operating revenue, the number of employees, or the company's total assets. For example:
- Chinese retail companies are small if they employ between 10 and 49 employees and have annual operating revenue of at least $1 million.
- Chinese real estate developers are small if they have annual operating revenue between $1 million and $10 million and have total assets between $20 million and $50 million.
- Chinese agriculture companies are small if their annual operating revenue is between $0.5 million and $5 million.
From 2021 to 2025, China is expected to invest heavily in its small and medium-sized enterprises. China's Minister of Industry and Information Technology Xiao Yaqing stated the country is expected to cultivate 1 million SMEs and 100,000 SMEs that feature innovation during this time.
SMEs in Developing Countries
In developing countries such as Kenya, small and mid-size enterprises go by the name MSME, short for micro, small, and medium-sized enterprises. In India, the acronym is MSMED, or micro, small, and medium enterprise development. Despite the differences in nomenclature, countries share the commonality of separating businesses according to size or structure.
Many people in emerging economies find work in small and mid-size enterprises (SMEs). SMEs contribute roughly 50% of total employment and 40% of GDP in these countries, according to the Organization for Economic Co-operation and Development (OCED).
The World Bank estimates that a majority of formal jobs in emerging markets (7 out of 10 jobs) are generated by SSMEs. However, these small business often face greater financing challenges compared to their developed country counterparts. The World Bank estimates that MSMEs in developing countries have unmet financing needs in excess of $5 trillion every year.
The Office of the United States Trade Representative estimates there are 30 million SMEs in the United States.
The Importance of Small and Mid-Size Enterprises (SMEs)
There is a plethora of data that demonstrates the massive economic impact SMEs have on the economy. Specific to the United States, SMEs play a vital role in the success of the nation's economy by contributing in a variety of ways.
- Small businesses comprise 99% of all firm in the United States.
- Small businesses contribute to 43.5% of the entire country's GDP.
- Small businesses pay 39.7% of the entire country's private payroll.
- Small business created 4.8 million more new jobs from 1995 to 2020 compared to large businesses.
Small businesses also have distinct advantages over larger companies:
- SMEs can often operate more flexibly. Large companies with broader processes touching more employees may find it more difficult to act as nimbly.
- SMEs often garner a stronger sense of community. Slogans such as "shop local" are geared towards supporting SMEs that don't have branches across the nation.
- SMEs are more likely to financially support their own community. Instead of collecting revenue and investing it in a new store across the country, SMEs are more likely to remain local, sustain local business, contribute local tax dollars, and buy from nearby suppliers.
- SMEs may be engrained with a rich history. Larger, complex companies may have a long history as well (especially if they've been financial successful). However, SMEs are more likely to carry family tradition, preserve how generations have done things, and are more likely to pass the family business down.
- SMEs may have a narrower, more direct focus than larger businesses. Imagine Apple developing iPhones, iPads, Macs, Apple Watches, accessories, and streaming services, While Apple has the staff to support each of these departments, a SME with limited staff must narrow the scope of what they offer. Instead of attempting to having a broad market presence, successful SMEs often deeply integrate themselves into a smaller target market.
U.S. SMEs can get access to education programs and coaching help from the Small Business Administration. These insights are meant to help owners make their businesses grow and survive, as well as target high-risk areas and boost tax compliance.
Life as a small and mid-size enterprise (SME) isn’t always easy though. These businesses generally struggle to attract capital to fund their endeavors and often have difficulty paying taxes and meeting regulatory compliance obligations. Governments recognize the importance of small and mid-size enterprises (SMEs) in the economy and regularly offer incentives, including favorable tax treatment and better access to loans, to help keep them in business. The types of loans include:
- 7(a) loans that guarantee portions of the total amount, cap interest rates, and fee limitations.
- 504 loans that can be used for longer-term fixed assets that lend money at a fixed rate for longer durations.
- Microloans less than $50,000 to help a SME start or expand.
SME loans through the SBA can range from $500 to $5.5 million.
Small Business Investment (SBICs)
The Small Business Administration also provides funding to specific small business investment companies (SBICs). These SBICs can then use their expertise to use private funds to invest in small businesses. SBICs can invest debt, equity, or a combination of both. To garner consideration from a SBIC for funding, a business must meet the following universal requirements at a minimum:
- The business must be a U.S. business. At least 51% of the company's employees and assets must be within the United States.
- The business must meet the definition of a small business. This qualification refers to the SBA sizing standards.
- The business must reside in an approved industry. Specific industries including farmland, real estate, and financing are excluded from consideration from receiving funding.
What Does SME Mean?
SME stands for small and medium-sized enterprises. As opposed to multinational conglomerates with locations around the world, SMEs are much smaller businesses that create a majority of jobs across the economy.
What Is an Example of a SME?
In 1971, a company called Starbucks opened its first store in Seattle's historic Pike Place Market. At the time, it might have been able to claim to be a SME. However, with Starbucks locations now all over the world, the company can no longer claim to be small.
Instead, other coffee shops can make the SME claim. For example, Lighthouse Roasters is an independent and locally owned coffee roaster. With a single address in Seattle, Lighthouse Roasters is considered a SME.
How Many Employees Are Employed by Small- to Mid-Size Business?
As of 2019 U.S. Census (the latest U.S. Census data available as of July 2022), employer firms with less than 500 workers employed 46.4% of private sector payrolls, while companies with fewer than 100 employees accounted for 32.4%.
What Is the Definition of a Small- to Mid-Size Business?
There is no set definition of what a small- to mid-size business, varying by country. In the U.S., the definition can vary by industry. Note that Gartner describes small businesses as those with less than 100 employees, and mid-size as those with 100 to 999 employees.
What Is the Percentage of Small- to Mid-Size Businesses in the United States?
As of July 2022, the most recent U.S. Census data for SMEs found there were 6.1 million employer firms in the U.S. Firms with fewer than 500 employees made up 99.7% of those businesses. Companies with less than 100 employees made up 98.1%.
The Bottom Line
Small and medium-size enterprises play a vital part in many economies around the world. Their innovation, flexibility, creativity, efficiency, and locality all play a part in successful SMEs. Through conscious consumer behavior, government assistance, and reliance on one's community, SMEs have engrained themselves as an important part of business.