What is a small business?
Small and medium enterprises (SMEs) make up 99% of businesses in the UK, but not all small businesses are classed as SMEs. You might think it doesn't really matter, but the classification of your business can have an impact on how you run it.
If, for instance, you fall into the ‘micro business’ category, then you’ll find the rules around switching business energy suppliers are slightly different to the rules for other types of business.
There are a number of factors that determine whether or not your business is classed as a microbusiness, small business or SME. Let's take a look to see where your firm fits in.
What is an SME?
The UK government defines SMEs into three categories, based on employee numbers and turnover:
- Microbusiness - less than 10 employees and an annual turnover under €2 million
- Small business - less than 50 employees and an annual turnover under €10 million
- Medium-sized business - less than 250 employees and an annual turnover under €50 million
Does everyone have the same definition of an SME?
Small businesses are the backbone of the UK economy – helping to provide jobs and support to spending on both a local and national scale - but it can be difficult to determine exactly which firms fit into the SME category.
If you asked 100 people 'what is a small business?’ you'd get a range of answers as there are different ideas about what actually makes a small business. To complicate things further, not everyone subscribes to the same definition and different organisations use their own criteria to determine what makes an SME.
The problem in providing specifics when trying to define small and medium enterprises is that no one can agree on a single description. Where the European Union (EU) offers its own SME definition, UK bodies such as Ofgem have a different interpretation of how medium, small and micro business sizes should be defined.
For example, the EU's business size standards use turnover, balance sheet total and employee size to determine their definition of an SME. But this may not be appropriate in certain industries. Business energy suppliers and utility providers, for instance, prefer to consider gas and electricity usage when deciding on suitable business size definitions.
Another issue with trying to determine how a small business is defined is that official bodies sometimes review their SME definition to reflect social and economic changes. Micro businesses, for example, are becoming more commonplace.
So, just how do we answer the question ‘what is a microbusiness?’ The government has issued its microbusiness definition to help distinguish between the needs of microbusinesses and small businesses.
Does the balance sheet matter?
The UK definition of an SME looks at employee numbers and turnover, but the EU definition also considers what's on the balance sheet. For reference, the balance sheet shows the assets and liabilities of a business (what it owns and what it owes) and can be used to show the value of your business on a certain date.
|Annual balance sheet total
|Equal to or less than €2 million
|Equal to or less than € 10 million
|Equal to or less than €43 million
Does the number of employees matter?
The number of staff that a business employs is one of the most widely accepted ways of indicating SME size. These figures can often change from country to country, but below are the official benchmark figures as set out by the EU and the UK.
|Number of employees
|Less than 10
|Between 11 and 50
|Between 51 and 250
|Between 251 and 1,000
|More than 1,000
Does the annual turnover matter?
Annual turnover is the total amount of money your business brings in as a result of the sales from your goods and/or services over a 12 month period. This can be across a calendar year or financial year, which is also known as a 'tax year' and runs from April 6 to April 5.
Both the UK and EU use the following annual turnover amounts to define the size of an SME.
|Equal to or less than €2 million
|Equal to or less than €10 million
|Equal to or less than €50 million
|Equal to or less than € 43 million
Does energy usage matter?
When sorting your business energy contracts, brokers and suppliers will use the Ofgem SME definition to work out what type of contract would best suit your needs. Below you can find the definition of micro, small, medium and large businesses by annual energy usage, ordered by the average business energy usage.
How much electricity does your business use?
To give you an idea of how much energy your business should be using, here's a guide to average business electricity usage.
|Electricity use by kWh
|Between 5,000 kWh and 15,000 kWh
|Between 15,000 kWh and 25,000 kWh
|Between 30,000 kWh and 50,000 kWh
|More than 50,000 kWh
How much gas does your business use?
To give you an idea of how much energy your business should be using, here's a guide to average business gas usage.
|Gas use by kWh
|Between 5,000 kWh and 15,000 kWh
|Between 15,000 kWh and 30,000 kWh
|Between 30,000 kWh and 65,000 kWh
|More than 65,000 kWh
Does business size affect insurance costs?
The majority of businesses will take out business insurance to protect their financial security, and this can be another useful indicator of their size. This method is not formally recognised by any official bodies outside of the insurance sector, but it is a good way to further define what an SME company is.
|Insurance premium cost per year
|Less than £500
|Between £500 and £2,000
|Between £2,000 and £6,000
|More than £6,000
Are there any exceptions?
When defining the size of your business, there are some exceptions to be aware of. The main one is that an enterprise (another way of saying 'a business') must be autonomous or part of a group of affiliated enterprises that together fall into the categories laid out above.
That basically means your business must be fully independent. If it is part of a group then to be classed as an SME your business must hold less than 25% of capital or voting rights in another business or another business must hold less than 25% of capital or voting rights in your business.
If, for example, your business is a franchise or has a close working relationship with another enterprise - and you exceed the threshold for the SME definition - then this means you cannot define your business as an SME.
You can find out more by reading the EC user guide to the SME definition.
Are you a small business owner?
In order to define your business’s size, you must first measure it against the corresponding employee number. In addition, you must also measure it against either the turnover or profit figures.
Providing you meet these criteria, you can declare your business as an SME. You can find out more in our guide to registering a business in the UK.
What are the benefits of declaring myself as an SME?
The size of your business can have an impact on everything from your business credit score to the energy rates you're offered and the amount you can borrow through a business loan. It also has a bearing on the amount you need to pay in taxes such as VAT and National Insurance Contributions.
If you run an SME, you could find you're also entitled to certain grants and other types of funding. Unlike business loans, there's no need to repay a grant, but it will come with certain conditions and can only be used for specific purposes. To find out more, check out our guide to the best grants for small businesses.
If you're looking to cut your business costs, get in touch with the tech-enabled team at Bionic. We can save you time and money when switching business essentials, including business energy, phone and broadband. We can also help you find insurance to protect against the unique risks that face your business, and future proof your business phone line with VoIP.