What Is an SME Business?

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Small- and medium-sized enterprises play an important social and economic role.
Small- and medium-sized enterprises play an important social and economic role. (Image: Todd Warnock/Lifesize/Getty Images)

The acronym SME stands for Small- and Medium-sized Enterprise or Small and Medium Enterprise. Although a widely recognized business category, there is no single definition of what constitutes an SME. Criteria vary depending on the location of the business, the industry in which it operates and the purpose for classification.

Criteria and Thresholds

The various definitions of what constitutes an SME are based on quantifiable and comparable criteria, such as the number of employees, level of sales receipts over a given period, turnover or assets. Thresholds then are set on each criterion based on the economic composition and industrial heritage of the country. Industry sector can affect the threshold, as in the U.S. and Canadian models. Other methods of categorization disregard industry sector, such as the definition of SME issued by the European Commission.

Economic Importance

SMEs play an important social and economic role. They contribute to innovation and entrepreneurship and employ a significant percentage of the working population. SMEs account for 98 percent of businesses in Canada and employ 48 percent of the labor force. In the European Union, 99 percent of businesses are defined as SMEs, providing 90 million jobs. Due to their economic importance, SMEs can access support schemes and funding assistance unavailable to larger organizations.

United States

In the United States, the Small Business Administration issues size standards that define small businesses by setting a maximum number of employees or annual receipts. Additionally, the organization must be independently owned and operated and must not be dominant in its field at a national level. The SBA size standards vary depending on the industry in which the business operates matched to the North American Industry Classification System. The SBA website contains a table giving a full breakdown of the criteria by industry.

Canada

Industry Canada defines a SME as a business having fewer than 500 employees. To be classified as "small," goods-producing businesses must have fewer than 100 employees, and service-based businesses must have fewer than 50 employees.

Europe

On Jan. 1, 2005, the European Commission adopted a definition of SME to be consistently applied across member states, the European Investment Bank and the European Investment Fund. The European Commission classifies a business as an SME if it is an independent, non-subsidiary organization employing fewer than 250 employees with turnover not exceeding 50 million euros or a balance sheet total not exceeding 43 million euros.

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