Small and Mid-size Enterprise (SME)

What do you mean by Small and Mid-size Enterprise (SME)?

Small and mid-size enterprises refer to the businesses where the number of employees, revenue earned, and the assets maintained are within a specific limit specified by a country.

Every country has a different criterion to decide what a small and mid-size enterprise (SME) is. Though the small and mid-size enterprises are small, they contribute a lot to the country's economy. The SMEs provide jobs, and they also fulfil the demand and supply aspect of the market in a country where they operate. The method to categorise an SME differs among countries as well as between industries sometimes. Economists and policymakers in almost all countries have recognised and hailed the role of SMEs in boosting a country's economy. They encourage the growth of SMEs by providing them cheap loans, a favourable tax regime and financial assistance.

Though the definition of SMEs may vary between countries, however, their main objective is to differentiate small and medium-sized businesses from large scale industries. SMEs are entrepreneurial and encourages innovation. However, one of the significant constraints to SMEs growth is a lack of finance.

Frequently Asked Questions (FAQs)

How do the US government classify SMEs?

In the United States, small businesses are classified according to their ownership structure, earnings, industry type, and employees' total number. For instance, the cap on the number of employees for a manufacturing business to be categorised as SME can be different from the number of employees allowed in another SME involved in natural mining resources. In the US and EU, companies with less than 10 employees are classified as small office/home office (SOHO).

There are no precise standards for classifying small and medium-sized businesses in the United States (SMEs). Companies with assets worth $10 million or less are classified as small companies, whereas companies with assets over $10 million are classified as medium businesses by the IRS.

There are no precise standards for classifying small and medium-sized businesses in the United States (SMEs). The European Union defines a small-sized enterprise as a company where the strength of employees is less than 50 and a medium-sized enterprise as a company where the number of employees is less than 250.  Besides, the small and medium-sized companies, as per EU, micro-companies employ not more than 10 employees.

What is the significance of SMEs for a country’s economy?

Small and mid-size enterprises (SMEs) are considered an engine of growth in developing and developed economies. SMEs are an indispensable part of a country's economy and represent about 90% of businesses and over 50% of employment worldwide. According to a survey, SMEs account for up to 60% of national employment and 40% of Gross Domestic Product in emerging nations. In the SME sector, around 80% of new job possibilities are created. Data suggests that there were more than 30 million small businesses in the US in the year 2016.

According to research, one out of every twelve employer enterprises in the United States closes each year. Furthermore, small businesses contribute approximately 44% of the US GDP. According to a study, while the dollar value of GDP accounted for by small firms increases, the percentage contribution is decreasing in the United States.

What are the advantages of Small and Medium Enterprises?

• Small and mid-size enterprises help in the generation of employment and thus do an excellent service to society. If a country's unemployment rate declines, it boosts its economy, and hence SMEs are rightly called the backbone of an economy.
• SMEs encourages flexibility and innovation.
• SMEs not only provide new opportunities to the unskilled and the semi-skilled workforce, but they help them acquire new skills by providing them proper training many times.
• SMEs stimulates competition and contributes to a healthy economy.
• They are quick to respond to changes in market demand. This is because they are more flexible due to their size and structure.

Why do small businesses close?

There are various reasons for the closure of small businesses across the world. However, the most important reason which prompts an SME to close is the cash flow problem. Low sales and low cash flow are often the reason why small businesses are forced to shut down. The drop in sales can be attributed to the change in market demand as there is a possibility that the customer might no longer need the products or services that are available. This leads to low sales and cash flow problems. With a lack of finances, it will be difficult for a small business to pay its debts or purchase merchandise.

Future of SMEs in the World?

Since SMEs are considered the backbone of a country's economy, governments worldwide have been encouraging the growth of small businesses by offering incentives like tax benefits, special allocation of funds for SMEs, and easy and quick accessibility to loans.

As per World Bank data, in emerging economies, SMEs contribute around 40% of GDP. According to World Bank, the development of SMEs is a top priority for many governments worldwide because, by the year 2030, there will be a need for 600 million jobs to meet the requirements of the increasingly global workforce. SMEs, on the other hand, produce almost seven out of 10 formal jobs in emerging economies. However, one of the significant constraints t to SMEs growth is a lack of finance.

Interestingly, as categorisation criteria for SMEs vary across different countries, so does the names and abbreviations. Usually, SME is used by international organisations like the United Nations, European Union, and the World Trade Organisation. In contrast, in the United States, SMEs are known as small-to-mid-size businesses (SMBs). Countries like India and Kenya go by the name MSME, which is the short form for micro, small and medium enterprises. Though the terminology of Small and mid-size enterprises is different across countries, however, the objective of all the countries is the same, i.e., to distinguish businesses according to their size and structure.

SMEs are the lifeline of a country's economy. For example, by the end of 2019, Canada had 1.2 million (97.9%) small businesses. In Canada, businesses are defined based on the number of paid employees. As such, in Canada, establishments with 1 to 499 paid employees are considered SMEs. Between 2013 and 2017, the average number of businesses that vanished in the country every year was 90,600.