SME Definition

SME Definitions Vary from Country to Country

Image shows a strip mall in a parking lot with a sunset behind it and it holds 5 establishments. Title reads: "Industries dominated by small to medium enterprises" and the buildings are labeled "Bar, Haircuts, Family Dentist, Law Office, Gym"
Image by Daniel Fishel © The Balance 2019

A small to mid-size enterprise (SME) is a business that maintains revenues, assets, or number of employees below a certain level. The criteria for determining an SME varies among countries and industries. For example, in the European Union (EU) a business with fewer than 250 employees is considered an SME, while in the United States an SME has fewer than 500 employees.

SMEs and the Global Economy

SMEs make up the vast majority of businesses in most countries. According to U.S. Census Bureau Data from 2016, of the 5.6 million employer firms in the U.S.:

  • 99.7% had fewer than 500 employees
  • 98.2% had fewer than 100 employees
  • 89.0% had fewer than 20 employees

SEMs contributed 46% of the private nonfarm GDP in 2008⁠, the most recent year for which the source data are available, making them extremely important for economic growth, innovation, and diversity.

Because of their contribution to the economy, greater difficulty in obtaining financing, and higher fixed cost of taxation and regulatory compliance, SMEs are often given incentives and more favorable tax treatment. Depending on the country, governments may use a range of policies to encourage growth of SMEs.

SME-Dominated Industries

Unsurprisingly, most SMEs reside in industries that don't require large initial capital investments. Based on 2016 U.S. Small Business Administration (SBA) loan approval rates, the fastest-growing SMEs are:

  1. Legal offices
  2. Fitness and recreation centers
  3. General freight trucking, local
  4. Dentists offices
  5. All other specialty trade contractors
  6. Landscaping services
  7. Snack and nonalcoholic beverage bars
  8. Veterinary services
  9. Other personal care services
  10. Drinking places (alcoholic beverages)
  11. All other personal services
  12. Physicians offices 
  13. Hotels (except casino hotels) and motels
  14. Engineering services
  15. Limited-service restaurants
  16. Beauty salons
  17. Child day-care services
  18. Beer, wine, and liquor stores
  19. Single-family housing construction
  20. Full-service restaurants

U.S. SME Definition

In the United States, the definition of an SME varies by industry, based on the North American Industry Classification System (NAICS), a system developed by the United States, Canada, and Mexico to standardize and facilitate the collection and analysis of business statistics.

The SBA provides a list of small business-size standards matched to the NAICS codes. To be considered a small business and be eligible to apply for government contracts and targeted funding, a business must be within the defined limits in terms of number of employees or revenue.

In manufacturing, for example, an SME is defined as having 500 to 1250 employees, whereas in wholesale trades it is typically 100 to 200 employees. Ranges within sectors can vary greatly. For instance, in sector 21, Mining, Quarrying, and Oil and Gas Extraction, a business involved in copper ore and nickel ore mining can have up to 1,500 employees and still be considered an SME, while a business involved in silver ore mining can only have up to 250 employees.

Canadian SME Definition

Innovation, Science and Economic Development Canada (ISED) uses the term SME to refer to businesses with fewer than 500 employees while classifying firms with 500 or more employees as large businesses.

Breaking down the SME definition, ISED defines a small business as one that has fewer than 100 employees⁠ if the business is a goods-producing business⁠, or fewer than 50 employees⁠ if the business is a service-based business. A firm that has more employees than these numbers, but fewer than 500 employees overall, is classified as a medium-sized business.

In Canada, a micro-business is defined as a business with fewer than five employees.

In its ongoing research program that collects data on SMEs in Canada, Statistics Canada defines an SME as any business establishment with 0 to 499 employees and less than $50 million in gross revenues.

European Union SME Definition

In the EU, a similar system is used to define SMEs. A business with a headcount of fewer than 250 is classified as medium-sized, a business with a headcount of fewer than 50 is classified as small, and a business with a headcount of fewer than 10 is considered a micro-business. The European system also takes into account a business’s turnover rate and its balance sheet.

Comparison of the European Union (EU) SME Definitions
Company Category Staff Headcount Turnover or Balance Sheet Total  
Medium-sized < 250 ≤ € 50 m ≤ € 43 m
Small < 50 ≤ € 10 m ≤ € 10 m
Micro < 10 ≤ € 2 m ≤ € 2 m

*From the European Commission Definition

There is no standard for defining SMEs in the United Kingdom. The most generally accepted SME classification is the one used by the EU.

China SME Definition

China's definition of an SME varies by industry. Examples are as follows:

Comparison of China's SME Definitions
Industry Staff Headcount Revenue
Heavy Industry < 1000 ≤ 400 m  
Wholesale Trade < 200 ≤ 400 m  
Retail < 300 ≤ 200 m  
Transportation < 1000 ≤ 300 m  
Warehousing < 200 ≤ 300 m  
Accommodation < 300 ≤ 100 m  
Restaurant/Catering < 300 ≤ 100 m  
Software/IT < 300 ≤ 100 m  
Real Estate Development   ≤ 2 b ≤ 100 m
Information Transmission < 2000 ≤ 1 b  

*From the Ministry of Industry and Information Technology, the National Bureau of Statistics, the National Development and Reform Commission, and the Ministry of Commerce (July 7, 2011)

Article Sources

  1. Organisation for Economic Co-operation and Development. "Small and Medium-Sized Enterprises (SMES)." Accessed May 15, 2020.

  2. Small Business and Entrepreneurship Council. "Facts & Data on Small Business and Entrepreneurship." Accessed May 15, 2020.

  3. U.S. Small Business Administration, Office of Advocacy. "Small Business GDP: Update 2002-2010." Accessed May 15, 2020.

  4. U.S. Census Bureau. "Introduction to NAICS." Accessed May 15, 2020.

  5. U.S. Small Business Administration. "Table of Small Business Size Standards Matched to North American Industry Classification System Codes," Pages 1-49. Accessed May 15, 2020.

  6. U.S. Small Business Administration. "Table of Size Standards." Accessed May 15, 2020.

  7. U.S. Small Business Administration. "SBA's Size Standards Methodology," Pages 36-37. Accessed May 15, 2020.

  8. Innovation, Science and Economic Development Canada. "Employment Size Category." Accessed May 15, 2020.

  9. Innovation, Science and Economic Development Canada. "Table 2: Number of Employer Businesses by Sector and Business Size (Number of Employees), December 2017." Accessed May 15, 2020.

  10. Anka Kekez and Michael Howlett. "Collaboration in Public Service Delivery: Promise and Pitfalls," Page 90. Edward Elgar Publishing, 2019.

  11. European Commission. "Small and Medium-Sized Enterprises (SMEs)." Accessed May 15, 2020.

  12. China Briefing. "China Issues Classification Standards for SMEs." Accessed May 15, 2020.