Finding a Standard Definition for Small Businesses

Out of 5.5 million businesses in the UK over 99% of them are SMEs. These small or start up businesses range from accountancy firms to zoos, but they are united by the determination of their owners to grow and prosper. And the question on every start-up owner’s lips is: at what point does a so-called “small business” evolve into a medium one?

What is an SME? (A rough definition.)

SMEs are defined as small to medium sized enterprises, you can split them out into 3 categories micro enterprises, small enterprises and medium sized enterprises. These are defined by the following:

What is a micro business?

The definition of a Micro Business:

• Number of employees in a micro business must be 10 employees or less

• The annual turnover of a micro business is under €2million

What is a small business?

The definition of a small business:

• Number of employees in a small sized business must be 10-50 employees

• The annual turnover of a small sized business is above €2million but below €10million

What is a medium sized business?

The definition of a medium sized business:

• Number of employees in a medium sized business must be 50-250 employees

• The annual turnover of a medium sized business is above €10million but below €50million

How legislation defines an SME

The government claims “SMEs are the employment engines of the economy.” As prolific providers of jobs, SME’s are therefore vital to the prosperity of our population. However, there’s no official definition of what an SME is, nor is there an agreed point at which a small business should be considered to have grown into a medium one. If the government, banks and small business insurance companies cannot agree on a formula for identifying an SME, then what hope is there for small and medium business owners themselves?

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 does not have more than 50 employees. A medium-sized company is defined as having 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 and the guide gave similar categories to the UK Companies Act. 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.

How the private sector defines an SME

These definitions bring a measure of clarity to the situation, but it is important to note that they are not binding. Many other organisations and bodies in the UK choose to devise their own definitions, usually calculating SME size according to the number of employees a business has, and either its turnover or balance sheet total. For example, the British Bankers Association (BBA) has its own definition of an SME, whereby small businesses are defined as sole traders, partnerships and limited companies with an annual turnover of under £1million.

Other companies’ definitions of what makes an SME draw a line between small and medium businesses, dependant on whether a company meets the VAT threshold, currently at £83,000. If your business trades globally, there can be even more confusion, as each country outside the EU measures the size of a business according to their own standards.

Without guidelines to follow, it can be hard for small and medium business owners to know how to categorise their organisation. This uncertainty can be particularly problematic with regard to acquiring small business insurance.

Defining your SME for insurance

The risks to your business can change greatly depending on industry and location, and for this reason many business owners welcome insurers who take a more flexible approach to gaging the size of a business. These clients don't want an 'off the shelf' solution for their company. Instead, they’d prefer to work with their business insurance company to build a bespoke policy, based on an assessment of their sector, size and the sometimes eclectic 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 insurers who specialise in safeguarding small and medium businesses. This will help business owners fell confident that they have understood the subtleties involved, and that they have got the best deal for their company.

However, this is a very general rule. Many insurers do not agree on which criteria should be used to define business size. Some insurers focus exclusively on a company’s turnover, whilst others place the most emphasis on its employee headcount. For some insurers, the key issue is whether the company is owner-run, or whether it’s a subsidiary branch of a larger company group.

As insurance providers draw on this diverse pool of criteria in forming an assessment of a business, it is not always possible to directly compare a selection of business insurance quotes. We’ll leave you with a tip that holds true, whatever the nature of your business: choose the correct levels of cover when taking out your business insurance and make sure you update your policy if your company changes size. This will keep your business covered at an appropriate level.