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What Is a Small Business?

Small business owners in their cafe.

Small business has a big impact on Australia’s economy, including employment and overall contribution to GDP. Given the important impact of small business, it’s important to have a clear definition of the term.

The definition of small business in Australia

The official definition is provided by the Australian Bureau of Statistics (ABS). According to the ABS, these businesses employ fewer than 20 people. Additional subcategories include:

  • Non-employing business – include sole traders and partnerships with no employees in addition to the business owners.
  • Micro-businesses – these businesses employ between 1 and 4 people. This category includes non-employing businesses.
  • Other small businesses – these businesses employ between 5 and 19 employees.

The ATO’s definition for tax concession purposes

For receiving tax concessions, the Australian Tax Office defines a small business as an entity that has an annual turnover (excluding GST) of less than $10 million. For financial years before 2016-2017, this amount was $2 million in annual turnover. Eligibility for government small business grants is also subject to criteria, usually including revenue. Other factors can include the number of employees and location of the business (for state grants).  Find out more in Small Business Grants for Business Growth

ASIC’s definition

According to the Australian Securities and Investment Commission (ASIC), ‘small proprietary companies’ need to meet two of the three following characteristics. These include having:

  • An annual turnover of less than $25 million
  • Fewer than 50 employees at the end of the financial year
  • Consolidated gross assets valued at less than $12.5 million at the end of the financial year.

 

Numbers of small businesses measured by employment

According to ABS numbers (from 2016), small enterprises employ over 97% of the people employed in Australia. The breakdown of employment by business definition is:

Size Total employees Percentage of total
Small (0-19 employees) 2,066,523 97.4
Medium (20-199) 50,955 2.4
Large (200+) 3,717 0.2

 

These figures show us that small to medium enterprises (SMEs) employ 99.8 of all workers employed by private entities in Australia. To put these numbers into perspective, 61 per cent of Australian businesses by number are sole traders who don’t have employees. Having 1 to 4 employees, micro businesses account for 27 per cent of businesses in Australia.

In June 2018 there were 1,987,000 public sector employees (local, state and federal), so these businesses employ more people than government bodies employ.

The key ABS findings regarding small business employment in  2017-2018 included:

  • Almost two-thirds of Australian businesses (1,435,547 or 62.1%) did not have employees
  • More than one-third of all businesses had employees (877,744 or 71.5%)
  • The most common type of employing business had between 1 to 4 employees (71.5% or 627,932 employing businesses).

Business turnover in Australia

The latest figures from the ABS show that most businesses (2,152,884 of 93.1%) had a turnover that was less than $2 million in 2017-2018. In addition, for annual turnover:

  • 26% of businesses had less than $50,000
  • 34% had between $50,000 and $200,000
  • 33% had between $200,000 and $2 million
  • 7% had more in than $2 million.

Important facts about small-to-medium enterprises in Australia

The Australian Small Business and Family Enterprise Ombudsman has compiled statistics that show the importance of these businesses in Australia. In Australia, SMEs:

  • Contribute $614.96 billion of total GDP, which is 57% of GDP
  • Employ 7 million people, 67% of all employment in Australia.

In addition, 56% of SMEs are operated by members of GenX or Millenial generations. Given this fact, SMEs will continue to play an important role in Australia’s economy well into the future.

Despite their importance, small businesses lack access to finance

Many small enterprises struggle to get the finance they need to grow. This situation has been worsened as a result of the Banking Royal Commission and falling housing prices. Traditional financers, such as banks, usually require collateral for their loans. Many business owners have used the equity in their homes to get business loans. In early 2019, some banks announced that they would no longer accept residential property as collateral for business loans. Other banks lowered their loan-to-value ratios, making it more difficult for these businesses to access funds.

Fortunately, fintech lenders such as Moula don’t require residential property as collateral for business loans. Find out more about small business loans from Moula. Small businesses can apply for small business grants. Criteria for these grants include a maximum annual turnover. Learn more in Small Business Grants to Grow Your Business

Author:

All the thoughts, ideas and musings from the Moula team! Covering everything from work/life balance to general finance tips plus everything in between!

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