What Is An SME? A Simple Guide

SME stands for small and medium-sized enterprises. The definition usually includes any business with up to 250 employees. So if you run a small or growing independent business, you’ll likely fall into this category. Read on to find out more.

SME stands for small and medium-sized enterprises. The definition usually includes any business with up to 250 employees. So if you run a small or growing independent business, you’ll likely fall into this category. Read on to find out more.

Emily Kindness
From the Business team
4
minute read
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Posted 14 JUNE 2021

What kinds of businesses count as SMEs?

There are a couple of official definitions used in the UK.

The Companies Act 2006 defines a small business as having:

  • No more than 50 employees
  • No more than £10.2 million in turnover
  • No more than £5.1 million balance sheet total


It defines a medium business as having:

  • No more than 250 employees
  • No more than £36 million in turnover
  • No more than £18 million balance sheet total

The EU’s definitions for business sizes are similar but include a third category – micro-business. EU definitions for SMEs are as follows:

  • Micro-businesses
    Fewer than 10 staff, turnover of 2 million euros or less, or balance sheet of 2 million euros or less
  • Small businesses
    Fewer than 50 staff, turnover of 10 million euros or less, or balance sheet of 10 million euros or less
  • Medium-sized businesses 
    Fewer than 250 staff, turnover of 50 million euros or less, or balance sheet of 43 million euros or less

 

What are the issues faced by SMEs?

There are a few areas where SMEs may be more vulnerable to setbacks than larger companies because of their size: 

Cashflow
Late-paying clients, difficulty getting access to finance and an uncertain business climate can pose risks to cashflow for a small company – and without ready cash, you just can’t stay afloat. Also, late payment can be a big issue. If small businesses were paid on time, the economy would be an estimated £2.5 billion better off every year, according to the Government. 

Liability
If someone or something is harmed due to mistakes you made, the costs could be high. Small and medium-sized businesses need to have a plan in place, such as public liability insurance for when things go wrong and they’re held accountable.

Employee illness or injury
In a small team, having even one person out of action due to illness or injury can significantly affect your ability to function, especially when you need to support that person with sick pay. And if the business’ founder or its leader is unable to work, the whole business could be at stake.

Compliance and legislation
Larger companies have whole departments dedicated to compliance and the legalities involved in doing business. In a smaller operation where there’s less in-house expertise, you could be more at risk of getting things wrong. 

Client dependence
As a small business, it’s easy to put all your eggs in one basket when a big client offers a lot of work over the long-term. But it’s often a good idea to keep other clients in your portfolio, so you’ll have something to keep you afloat if that big relationship suddenly ends. 

Pros and cons of being an SME

There are several pros and cons of being an SME, and you’ll need to weigh them up against each other. The pros and cons could include:


Pros:

  • You’re more agile
    It’s usually easier to change your ways of working when you’re a smaller organisation
  • Your people wear many hats
    Workers in small companies and start-ups have to be flexible. They’re more likely to be able to turn their hand to whatever comes their way.
  • You can get closer to your customers
    A smaller business can get to know each customer well and provide a really personal service

Cons:

  • You may be perceived as riskier
    Some clients might prefer to do business with a larger company as it may seem more stable, especially if it has been trading for a long time.
  • There’s a lot of work to do
    Small business owners often find themselves working long hours as they go above and beyond for their company, which could lead to burnout.
  • You have fewer in-house resources
    You may find yourself having to outsource functions like HR, consultancy and training, which involves researching, choosing and paying for reliable suppliers.
  • You don’t get economies of scale
    Avoiding buying in bulk means you probably won’t have the same advantage that big companies have, when you negotiate prices with suppliers. 

Help and support for SMEs

The Government’s Small Businesses Commissioner offers advice and support for SMEs who are dealing with late-paying customers. Their data shows that a third of payments to the UK’s small businesses are late, and 20% of small businesses have encountered cashflow problems due to late payments. 

SMEs in the UK can claim research and development tax relief if they meet the Government’s criteria for research and development. If your company does innovative work in science and technology, you could be eligible for an extra 130% annual deduction against business costs. 

Start-up Loans are Government-backed loans of up to £25,000 for SMEs, with a fixed interest rate.


And if you’re in the north of England, also check out the Northern Powerhouse Investment Fund for support and access to borrowing. 

Help during COVID-19
The Government’s Self-Employment Income Support Scheme (SEISS) programme supports sole traders and members of a partnership affected by COVID-19. It provides taxable grants to eligible self-employed individuals and members of a partnership, based on a percentage of their profits in previous tax years. 

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