Finding a standard definition for Small Businesses

Out of the 5.2 million businesses in the UK, over 99% of them are SMEs. These small or start up businesses range from accountants to zookeepers however, they are united by the determination of their owners to grow and prosper.

The government claims SMEs are the employment engines of the economy however, there is no single definition of what an SME is. Nor is there much agreement as to where a business stops being "small" and starts being "medium". With the government, banks and small business insurance companies failing to agree on what makes an SME an SME, what hope do small and medium business owners themselves have?

According to the UK's Companies Act 2006 a small company is defined as one that does not have a turnover of more than £6.5million, a balance sheet total of more than £3.26 million and not more than 50 employees. While a medium-sized company is one with less than 250 employees and a turnover of under £12.9 million.

In 2005, the European Commission created a guide called  ' The New SME Definition' (.pdf) which aimed to promote entrepreneurship, investments and growth by creating a single definition for SMEs across the EU. The guide gave similar categories to the UK Companies Act.  But a third definition - the Micro business - was also introduced and defined as a business with less than 10 employees and a turnover of under €2 million.

However, these definitions are not binding and many other organisations and bodies in the UK choose to make their own definitions. For example, the British Bankers Association (BBA) has its own definition of an SME. In this instance, small businesses are defined as sole traders, partnerships and limited companies with an annual turnover of under £1million.

Other definitions draw the line between small and medium business dependant on whether a company meets the VAT threshold, currently at £81,000. And if your business trades globally, there is even more confusion, with each country outside the EU using their own standards.

Without clear definitions it can be hard for small and medium businesses to know how to identify themselves. An issue that is especially problematic when it comes to small business insurance.

While some want clear and straightforward categories, many business owners welcome a more flexible approach to defining business size. They don't want an 'off the shelf' solution for their company, and prefer to work with their business insurance company to build a bespoke policy that is right for them based on an assessment of their sector, size and nature of their business.

Until there is a single, unified definition for SMEs, any company taking out business insurance would be best advised to talk to an insurer who are small and medium business insurance specialists. That way they can be sure they have understood the subtleties involved and that they have got the best deal for their company.

As a general rule then, small and medium enterprises can be defined as follows:

However, this is a very general rules and many insurers do not agree on which criteria defines business size. For some it is solely about turnover, for others it is employee headcount, and for others still the key issue is whether the company is owner run and not a part of a larger company group.

This means that a direct comparison of business insurance quote is quiet often impossible. Always ensure you choose the correct category when taking out your business insurance and update your policy if your company changes size. This will keep your business covered at an appropriate level.