What Are SMEs?

Ref. https://www.thebalancesmb.com/sme-small-to-medium-enterprise-definition-2947962

Updated June 29, 2020

A small- to mid-size enterprise (SME) is a business with revenues, assets, or numbers of employees that fall below a certain level. The criteria for determining an SME varies between countries and sometimes between industries.

Here are some examples of what SMEs are, the role they play in the economy, and how countries differ in their definitions.

What Are SMEs?

Unfortunately, there isn't a set definition of SME that applies globally. Each country gets to set its own definition, and they may also decide to set specific limits for specific 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 may have up to 1,200 employees.1 2

However, there is a shared goal of defining an SME in that it seeks to differentiate small businesses and medium-sized businesses from large corporations.

SMEs make up the vast majority of businesses in most countries. According to the Small Business Administration (SBA), 99.9% of U.S. businesses in 2018 were small businesses.3 The SBA also says that small businesses accounted for roughly 44% of U.S. GDP in 2014 (the latest year for which data was available).4 While this is actually a decrease in GDP share since the '90s, SMEs remain an important aspect of economic growth, innovation, and diversity.

SMEs are often given incentives such as help obtaining financing and favorable taxation, though the form of aid and extent to which SMEs are helped depends on the country.

SMEs can come from any industry, but by their nature, some businesses are more likely to be SMEs than others. For instance, legal offices, trucking companies, personal care services, dentist offices, restaurants, and bars often operate with relatively few employees.

How SMEs Work

To better understand how SMEs work, it may be best to examine them on a country-to-country basis.

SMEs in the U.S.

The SBA maintains a list of small business size standards. These standards determine the upper limits for a business to be eligible for favorable government contracts and targeted funding. Depending on the industry, these limits may be tied to revenue, or they may be tied to the number of employees.

The limits may further break down an industry by product. For example, a manufacturing business in wet corn milling is considered a small business if it has under 1,250 employees, while a small manufacturing business in rice milling can't have more than 500 employees.1 The limits for many forms of farming, on the other hand, are set at a revenue cap of $1 million rather than at an employee count.5

SMEs in Canada

Innovation, Science and Economic Development Canada (ISED) uses the term SME to refer to businesses with fewer than 500 employees.6 ISED defines a small business as one that has fewer than 100 employees. A micro business is one with fewer than five employees.

As in the U.S., the vast majority of Canadian businesses are SMEs. In December 2017 (the latest data available), 99.8% of Canadian businesses had fewer than 500 employees.7

SMEs in the European Union

In the EU, a business with an employee headcount of fewer than 250 is classified as an SME.2 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 sets a €43 million limit for an SME's balance sheet total (as opposed to limiting total revenue).

SMEs in China

As in the U.S., the definition of an SME in China varies by industry.8 The upper employee limits for an SME can be as small as 200 or as large as 1,000.

Key Takeaways

• SMEs are small or medium-sized businesses that meet certain restrictions on employees or financial measurements.
• The exact definition of an SME depends on the country in which the business operates, and it may also depend on the industry.
• SMEs make up the vast majority of businesses.