SME Definition (Small to Medium Enterprise)
SME Definitions Vary from Country to Country
What are SMEs? SME stands for Small to Medium Enterprise.
However, what exactly an SME or Small to Medium Enterprise depends on who’s doing the defining. Depending on the country, the size of the enterprise can be categorized based on the number of employees, annual sales, assets, or any combination of these. It may also vary from industry to industry (as it does in the U.S.)
SMEs Have a Dominant Share of the Global Economy
Small to medium enterprises (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 hugely important for economic growth, innovation, and diversity.
Because of their contribution to the economy and their generally greater difficulty in obtaining financing and their 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 the growth of SMEs.
SMEs 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:
- Legal offices
- Fitness and recreation centers
- General freight trucking, local
- Dentists offices
- All other specialty trade contractors
- Landscaping services
- Snack and nonalcoholic beverage bars
- Veterinary services
- Other personal care services
- Drinking places (alcoholic beverages)
- All other personal services
- Physicians offices
- Hotels (except casino hotels) and motels
- Engineering services
- Limited-service restaurants
- Beauty salons
- Child day care services
- Beer, wine and liquor stores
- Single family housing construction
- Full-service restaurants
U.S. SME Definition
In the U.S., the definition of an SME varies by industry, based on the North American Industry Classification System (NAICS). NAICS is a system developed by the U.S., Canada, and Mexico to standardize and facilitate the collection and analysis of business statistics.
The U.S. Small Business Administration (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 a number of employees or revenue.
In manufacturing, for example, an SME is defined as having 500 employees or less, whereas in wholesale trades it is typically 100 employees or less. Ranges within sectors can vary quite a bit. 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
Industry Canada 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, Industry Canada 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 cut-offs but fewer than 500 employees is classified as a medium-sized business.
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 (EU) SME Definition
In the EU, a similar system is used to define Small to Medium Enterprises. 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
UK SME Definition
There is no standard for defining SMEs in the UK. The most generally accepted SME classification is the one used by the EU (above).
China SME Definition
China's definition of an SME varies by industry. Here are some examples:
|Comparison of China's SME Definitions|
|Industry||Staff headcount||Revenue (RMB)||Assets|
|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|
Also Known As: Small to Medium Enterprise.
Examples: Having a standard SME definition makes gathering and analyzing statistical information about businesses easier.