What Are Small and Midsize Enterprises (SMEs)?
Small and midsize 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 midsize enterprise. Certain size criteria must be met, and occasionally, the industry in which the company operates is taken into account as well.
- Small and midsize 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 midsize 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 an 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 SMEs in business.
What Is the Role of SMEs in an Economy?
Small and midsize enterprises can exist in almost any industry but are more likely to reside within industries requiring fewer employees and smaller up-front capital investments. Common types of SMEs include legal firms, dental offices, restaurants, and bars.
SMEs are segregated from large, multinational companies because they fundamentally operate differently. Large, complex firms may require advanced enterprise resource planning (ERP) systems—for accounting, supply chain management and financial reporting, and interconnectivity across offices around the world—or deeper organizational processes. SMEs, on the other hand, may require fewer systems given their narrower scope of operations.
Small and Midsize Enterprises (SMEs) Around the World
SMEs in the U.S.
In the United States, the Small Business Administration (SBA) classifies a small business 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 1,400 employees and still be identified as SMEs. The U.S. distinctly classifies companies with fewer than 10 employees as a micro business.
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 midsize to large businesses into another. The IRS classifies small businesses as companies with assets of $10 million or less and large businesses as those with more than $10 million in assets.
The SBA Office of Advocacy reported almost 33.2 million small businesses in the U.S., as of March 2023. Of these, 82% did not have any employees. Within the U.S. economy, small businesses comprise 99.9% of all firms, 99.7% of all firms with paid employees, and 97.3% of exporters.
In the United States, SMEs are disproportionally owned by white males, highlighting the lack of access to financial and entrepreneurial resources across races and genders. For example, a March 2023 report by the SBA found only 19.6% of employer firms were owned by minorities and only 21.7% of employer firms owned by women.
SMEs in Canada
The Canadian government issues Canadian Industry Statistics that define each type of business based on the number of employees it has.
- Micro businesses have 1–4 employees.
- Small businesses have 5–99 employees.
- Medium businesses have 100–499 employees.
- Large businesses have 500+ employees.
In 2023, businesses with fewer than 100 employees accounted for 97.9% of all employer businesses in Canada. Small and micro businesses employed 10.9 million individuals—more than 62% of the total employed workforce.
SMEs in the European Union (EU)
The European Union (EU) offers definitions of what constitutes a small-size company as well. Small-size enterprises are companies with fewer than 50 employees, and medium-size enterprises are ones with fewer than 250 employees. In addition to small and midsize 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 EU. SMEs employ an estimated 100 million individuals and generate more than half of the European Union’s gross domestic product (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, number of employees, or total assets. The following examples highlight these classifications:
- Chinese retail companies are small to medium if they employ 10 to 49 employees and have annual operating revenue of at least $1 million.
- Chinese real estate developers are small to medium if they have annual operating revenue of $1 million to $10 million and total assets of $20 million to $50 million.
- Chinese agriculture companies are small to medium if their annual operating revenue is $0.5 million to $5 million.
Under the five-year plan from 2021 to 2025, China plans to invest heavily in its small and midsize enterprises. The country is expected to cultivate 1 million SMEs and 100,000 SMEs that feature innovation during this time, according to the Department of Industry and Information Technology.
SMEs in Developing Countries
In developing countries such as Kenya and India, small and midsize enterprises go by the acronym MSME, short for micro, small, and medium-size enterprises. Regardless of criteria, countries share the commonality of separating businesses according to size or structure.
Many people in emerging economies find work in small and midsize enterprises. SMEs contribute roughly 50% of total employment and 40% of GDP in these countries, according to the Organisation for Economic Co-operation and Development (OCED).
The World Bank estimates that a majority of formal jobs in emerging markets (seven out of 10 jobs) are generated by SMEs. However, these small businesses 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 Importance of Small and Midsize Enterprises (SMEs)
A plethora of data demonstrates the massive economic impact that SMEs have on a country’s 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 more than 99% of all firms in the U.S.
- Small businesses contribute 43.5% of the entire U.S. GDP.
- Small businesses pay 39.4% of the entire U.S. private payroll.
- Small businesses created 62.7% of new U.S. jobs from 1995 to 2021.
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 toward 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 businesses, 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 financially successful). However, SMEs are more likely to carry family traditions, preserve how generations have done things, and pass down the family business.
- SMEs may have a narrower, more direct focus than larger businesses. Think of Apple, for example. Developing iPhones, iPads, Macs, Apple Watches, accessories, and streaming services requires the staff to support each of these departments. However, an SME with limited staff must limit the scope of what it offers. Instead of attempting to have a broad market presence, successful SMEs often deeply integrate themselves into a smaller target market.
Estimated number of SMEs in the United States, according to the Office of the United States Trade Representative.
What Incentives Are Available to SMEs?
U.S. SMEs can gain 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 midsize enterprise isn’t always easy. 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 SMEs to their economies and regularly offer incentives, including favorable tax treatment and better access to loans, to help keep SMEs in business. Types of loans include:
- 7(a) loans that guarantee portions of the total amount, cap interest rates, and limit fees
- 504 loans that offer fixed-rate financing over a longer duration for the purchase or repair of assets such as real estate or equipment
- Microloans for up to $50,000 to help an SME get off the ground or expand
SME loans through the SBA can range from $500 to $5.5 million.
Small Business Investment Companies (SBICs)
The Small Business Administration also provides funding to specific small business investment companies (SBICs). These SBICs can then use their expertise to invest private funds in small businesses. SBICs can invest debt, equity, or a combination of both. To garner consideration from an 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 receiving funding.
What Does SME Mean?
SME stands for small or midsize enterprise. As opposed to multinational conglomerates with locations around the world, SMEs are much smaller businesses that create a majority of jobs across the world economy.
What Is an Example of an 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 an SME. But with Starbucks locations now all over the world, the company can no longer make that claim. That option has passed to other coffee shops, such as Lighthouse Roasters, an independent and locally owned coffee roaster. With a single address in Seattle, Lighthouse Roasters is considered an SME.
How Many Employees Are Employed by Small to Midsize Businesses?
According to the U.S. Census Bureau, employer firms with fewer than 500 workers accounted for 45.9% of private-sector payrolls in 2021, while companies with fewer than 100 employees accounted for 32.4%.
What Is the Definition of a Small to Midsize Business?
There is no set definition of a small to midsize business, and it varies by country. In the United States, the definition can also vary by industry. Note that Gartner, the information technology (IT) consulting service, describes small businesses as those with fewer than 100 employees and midsize businesses as those with 100 to 999 employees.
What Is the Percentage of Small to Midsize Businesses in the United States?
The most recent U.S. Census data for SMEs found that there were 6.3 million employer firms in the U.S. in 2021. Firms with fewer than 500 employees made up 99.7% of those businesses. Companies with fewer than 100 employees made up 98.3%.
The Bottom Line
Small and midsize enterprises play a vital part in many economies around the world. Their innovation, flexibility, creativity, efficiency, and locality all play a part in making them successful. Through conscious consumer behavior, government assistance, and reliance on their communities, SMEs have established themselves as an important part of the broader economy.