What Are SMEs & Why Are They So Important for the UK Economy?

12th June 2019 | 4 min read

What Are SMEs and Why Are They So Important for the UK Economy?

Small and medium-sized enterprises – or SMEs for short – are extremely important for the economy. From local shops to small tech firms working out of serviced offices, the majority of companies in the UK are SMEs. In 2018, Parliament identified 5.7 million SMEs, making up 99% of all businesses in the country. There were 5.4 million micro businesses (companies with 0-9 employees), which accounts for 96% of all businesses in the UK.

What Are SMEs?

In the UK and Europe, SMEs are defined as independent businesses with fewer than 250 employees (in the U.S., a company can employ up to 500 workers and still be considered an SME). They have an annual turnover of less than €50 million (about £40 million), or an annual balance sheet total that doesn’t exceed €43 million (approximately £34 million).

Broadly speaking, there are two main types of businesses operating within the small scale sector. The first are traditional cottage or household industries. They’re usually found in rural or semi-urban areas, and offer a lot in the way of part-time employment.

The second type – which are often referred to as ‘modern SMEs’ – are particularly innovative where technology is concerned. They come up with creative solutions to old problems, and introduce new concepts or ways of doing things; most startups fall into this category.

How SMEs Support Economic Growth

SMEs are generally thought to be the backbone of any healthy economy; they drive growth, provide employment opportunities and open new markets. According to one study, which was carried out by Santander, SMEs contributed to 51% of all turnover generated by the private sector in 2018.

SMEs generate lots of employment opportunities across the UK.

They also create a group of skilled and semi-skilled workers to support future industrial and business expansion in the country. The stability of the UK economy relies on low unemployment rates. Workers – who themselves provide goods and services – earn a wage which they then spend on goods and services. Consumer spending is the factor that most affects economic growth and GDP (or gross domestic product). The latter is the total market value of all goods and services within a country; it’s one of the primary indicators used to measure the economic health of a nation. Businesses won’t invest in capital and labour, or try to expand to meet consumer demand if people aren’t spending.

Currently, SMEs employ around 16.3 million people, contributing to 60% of all jobs in the UK. It’s been reported that SMEs have created over 2 million jobs in the past 5 years. In the study cited above, SMEs were found to be especially important to the local economies of South West England, Wales and Northern Ireland; in these areas, SMEs account for 70% of jobs within the private sector. Small businesses are particularly effective when it comes to supporting local economies; they bring growth, prosperity and innovation to areas outside of our main cities, which facilitates the equal distribution of income and wealth.

SMEs generate competition and encourage further innovation across a range of industries.

They provide the economy with a healthy supply of new skills and ideas, and make the marketplace more dynamic. If we think about the success of startups like Uber, Deliveroo and Airbnb – all of whom have shaken up their respective industries – it’s clear that SMEs have a firm foothold at the moment, thanks to advances in technology. Entrepreneurs are identifying new markets and setting up SMEs to open up these new markets.

SMEs can respond and adapt more quickly to changes in the economy.

Because they’re usually more customer-orientated or understand the needs of their local community, small businesses are more likely to survive economic downturns too.

Currently, SMEs account for at least 99.5% of businesses across every main industry sector. SMEs are recognised as being vital to the UK economy, and the government has identified that they could be the key to increasing the country’s productivity, which has continued to fall in recent years. As such, there’s been more investment in funding to support small businesses. Whether you’re a business owner looking for some sound advice or an entrepreneur in need of a start-up loan, there are plenty of initiatives worth looking at. You’ll find details of these on the GOV.UK website.