SMEs (Small and Medium Enterprises) are companies with income, assets, or number of employees that are below a certain level. The criteria for determining an SME vary between countries and sometimes between industries. They are responsible for the greatest generation of employment in a country.
Unfortunately, there is no set definition of SMEs that is applied globally. Each country can set its own definition and can also decide to set specific limits for specific industries.
For example, in the European Union (EU), a company with fewer than 250 employees is considered an SME, while, in the United States, an SME can have up to 1,200 employees. However, there is a shared goal of defining an SME in the sense that it seeks to differentiate small and medium-sized companies from large corporations.
SMEs make up the vast majority of companies in most countries. According to the Small Business Administration (SBA), 99.9% of American businesses in 2018 were small businesses. The SBA also says that small businesses accounted for about 44% of US GDP in 2014 (the latest year for which data was available).
While this is a decline in the share of GDP since the 1990s, SMEs remain an important aspect of economic growth, innovation, and diversity.
What are the advantages of SMEs?
There are several advantages associated with the small and medium business credit society for microentrepreneurs and small businesses. This is because they are responsible for the largest generation of income and jobs in a country.
For an entrepreneur, SMEs are advantageous because they represent:
- Less bureaucracy.
- Ease of access to the market.
- Practice getting credit (due to the credit incentive for small businesses).
- Structure flexibility.
- These companies represent a great opportunity for professional development and recognition. This occurs because the interaction between the team is much greater with a reduced staff.
- In addition, they tend to grow faster, constantly creating new jobs.
What are the disadvantages of SMEs?
Even with several advantages, a small team can represent even more work for the team.
For entrepreneurs, smaller companies, which are often start-ups, pose higher risks. This is because they are even more dependent on customers and the current situation in their market.
Therefore, if you are interested in SMEs, it is worth analyzing whether they suit your interests and your financial situation.
Examples of SMEs
Here are some examples of what SMEs are, the role they play in the economy, and the differences between countries in their definitions.
- Coffee shops
- Small restaurants
In the United States, for example, the definition of SMEs changes according to the company, industry, company, or organization and depending on the area where it is developed.
- Agriculture: with a maximum average income of 750 thousand dollars.
- Mining: employees from 250 to 1500 maximum.
- Transportation and storage: a maximum of 500 to 1500 employees. With annual revenues of $ 7.5 to $ 37.5 million on average.
- Public services: a maximum of 250 to 1000 workers.
- Construction: maximum revenue of $ 36.5 million.
- Information: Maximum of 500 to 1,500 employees with $ 7.5 to $ 38.5 million maximum in average annual revenue.
Characteristics and Classification
There are several classifications to define a small or medium business. It is made based on:
- Production (goods and services)
- Property (private or state)
- Dimension (small, medium, or large)
- Economic form (industry, trade, or mixed)
The classification by annual income does not consider the income of medium-sized companies, since they do not have a specific tax regime. However, micro and small companies are divided into three types, they are:
- Individual Micro entrepreneur (MEI): self-employed, can have up to one employee, and generates an annual income of up to R $ 81,000.
- Microenterprise (ME): generates annual income equal to or less than 360 thousand reais.
- Small Business (EPP): generates annual revenues of more than 360 thousand reais and less than 4.8 million reais.
Differences between SMEs and startups
Small and medium-sized businesses are often mistaken for startups. Many young entrepreneurs call their small businesses a start-up. In companies, the use of appropriate terminologies is important to avoid any problems that may arise in the future. This happens due to a lack of knowledge about the two terms.
So, let’s understand the key points of difference between the two.
- Technology: Startups tend to use modern high-end technologies, while SMEs require less use of technology.
- Business model: Startups choose an unconventional business model, while SMEs choose a tried and tested business model.
- Innovation: A unique characteristic of a startup is disruptive innovation. Startups create new offerings or innovate existing ones, while SMEs deal with existing offerings.