What is a SME business?

Is this a business term you hear regularly but aren’t sure of the exact answer? Although there are varying factors and characteristics to determine what is a SME business, it’s important you’re aware of what it actually means as it can affect the way you run your own business.

Defining the size of a business is intrinsic to the definition of SMEs. And with that in mind, over 99% of small and medium businesses in the UK, fall under the SME population. So, where does your business fit in?

Meaning and definition of SME

SME is the term to define ‘small and medium enterprises’. According to the UK Government and Companies House, SMEs are essentially based on the number of employees and business turnover. This is split into 3 categories.

  • Micro-business: has under 10 employees with an annual turnover under £1.7 million
  • Small business: has less than 50 employees with an annual turnover under £8.2 million
  • Medium-sized business: has less than 250 employees and an annual turnover under £41 million 

SMEs differ according to each industry or country’s definition. For example, in the EU, any business with less than 250 employees is classed as an SME. However, in the USA, that number increased to up to 1,200 employees.

Are sole traders included as a SME?

As a sole trader, you are simply one owner which is inseparable from the responsibilities of the legalities of a business. Therefore, for a sole trader to be included in the definition of a SME business, they must have employees. Alternatively, they can be grouped as having an SME with zero employees. That said, should you employ people in your business, it’s likely you’re a limited company, rather than a sole trader.

Some characteristics of a SME

  • Small or medium sized enterprises generally know their clients better in comparison to a corporate business whereby customers are purely numbers on a spreadsheet.
  • Similarly, an employer of a SME will know their staff on a personal level, thereby creating a positive working team. However, due to a smaller workforce, it often means that the business owner and employees must have multiple skillsets.
  • The small size of a business usually relies on the owners to fund the business. This can lead to limited finances for marketing, production and technology. Subsequently, SMEs can have less bargaining power when it comes to pricing against larger companies in an industry.
  • Larger companies have entire departments dedicated to the legalities of running a business. In contrast, small or medium business only have themselves to be accountable. This can ultimately give rise to making mistakes. For example, in terms of business insurance so hiring an industry professional can help.
  • Depending on the size of a business, it will have an effect on how much you pay for VAT, National Insurance and even energy prices.



About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.