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The SMME sector is generally categorized into three: micro, small and medium enterprises or businesses. The micro SMMEs are the smallest among the three categories. While experts agree that SMMEs are the backbone of any economy, there is no universally accepted definition. Du Toit et al. (2012:52) ascribe this difficulty in formulating a universal definition to the varying economies of countries and the fact that people adopt particular standards for specific purposes.

While national governments, bilateral donor agencies and international organizations such as the European Union (EU), World Bank and regional development banks each have their own formal definitions of what defines an SMME, the definitions have the commonality that they recognize enterprises of a certain size as either “micro,” “small” or “medium-sized” in comparison to larger enterprises. The definitions typically include aspects such as number of employees, size of annual turnover, and total assets. The

term SMME stands for “small and medium scale enterprises,” and according to Lucky and Olusegun (2012:488), they are firms or businesses arising as a result of entrepreneurial activities of individuals.

Du Toit et al. (2012:52) observe that in most countries, it is an accepted practice to make use of quantitative criteria when attempting to define a small business enterprise. Example of quantitative criteria in defining a small business are:

 number of employees

 sales volume

 value of assets

 market share

Moore et al. (2010:5) state that efforts to define SMMEs use criteria such as number of employees, sales volume, and value of assets. Conceding that there is no generally accepted definition, Moore et al. (2010:5) argue that the following criteria define a business as an SMME.

 The business is relatively small, with the number of employees fewer than 100.

 Except for its marketing function, the business’s operations are geographically localized.

 Financing for the business is provided by no more than a few individuals.

 The business usually begins with an individual.

2.6.1.1 International definitions

The United Nations Industrial Development Organization (UNIDO) defines SMMEs differently for industrialized and developing countries. According to UNIDO (2005), the definition for industrialized countries is:

 medium—firms with 100-499 workers;

 small—firms with 99 or fewer workers.

And the classification for developing countries is:

 large—firms with 100 or more workers;

 medium—firms with 20-99 workers;

 small—firms with 5-19 workers;

 micro—firms with fewer than 5 workers.

The Asia Pacific Economic Cooperation (APEC), as quoted in United Nations Economic and Social Council (ECOSOC) (2012), states that SMEs are enterprises with fewer than 100 employees, with a medium-sized enterprise employing between 20 and 99 people; a small firm employing between 5 and 19; and a micro firm employing fewer than 5 people including owners/managers.

European Union (EU) member states employ their own varied definitions of what constitutes an SMME, but have recently attempted to standardize these definitions as follows:

 Firms with fewer than 10 employees—micro;

 Firms with fewer than 50 employees—small;

 Firms with fewer than 200 employees—medium.

In contrast, in the United States where small businesses are defined by the number of employees, businesses with fewer than 100 employees are classified as small, while those with fewer than 500 are called medium-sized enterprises (Natarajan & Wyrick, 2011:1). Jeppesen et al. (2012:28) warn that definitions based only on the size (number of employees, turnover, profitability, net worth, etc.) of enterprises suffer from lack of universal applicability. In their opinion, this is because enterprises may be conceived of

in varying terms. Lussler (2012:21) alerts us to the danger of using size to define a firm by stating that, on the basis of this criterion, in some sectors all firms may be regarded as small, while in other sectors none will be.

According to Lussler (2012:21), a business can be considered small if it is independently owned, operated and financed independently, has a relatively small share of the market and relatively little impact on its industry.

From the various definitions discussed above, it is clear that internationally, there is no consensus on what constitutes an SMME. Definitions vary across industries and also across countries. Therefore, before an operational definition is proposed for the purpose of this study, it is necessary to look at the South African and Lesotho definitions of SMMEs, since the research is South Africa-Lesotho based.

2.6.1.2 South African definition

The most widely used framework in South Africa to define small businesses is the National Small Business Act 102 of 1996. The Act employs both the qualitative and quantitative criteria in its definitions, and refers to small, medium and micro enterprises (SMMEs).

In terms of the qualitative criteria, a business will be regarded as belonging to the SMME sector if it fulfils the following conditions:

 must be a separate and distinct entity;

 cannot be part of a group of companies;

 must include subsidiaries and branches (where applicable) when measuring its size;

 should be managed by its owners;

 can be a neutral person, sole proprietorship, partnership or a legal person such

The quantitative indicators include:

 total full-time employees;

 total annual turnover; and

 total gross asset value (excluding fixed property). (Nieman, 2006:4).

The way in which the National Small Business Act 102 of 1996 distinguishes micro, very small, small and medium businesses is as follows:

 Micro enterprise: Turnover is less than the VAT registration limit (that is, R150

000 per year). These enterprises usually lack formality in terms of registration. They include, for example, ‘spaza’ shops, minibus taxis and household industries and employ no more than 5 people. These businesses are also sometimes called survivalist businesses. This category is considered pre-entrepreneurial and includes hawkers, vendors and subsistence farmers.

 Very Small: Generally, these are enterprises employing fewer than 10 people, with the exception of those in the mining, electricity, manufacturing and construction sectors, in which there can be up to 20 employees. Usually, these enterprises operate in the formal market.

 Small enterprises: The upper limit for these types of businesses is 50 employees.

Small enterprises are generally more established than very small enterprises and exhibit more complex business practices.

 Medium enterprises: The maximum number of employees is 100, or 200 for the

mining, electricity, manufacturing and construction sectors. These enterprises are often characterized by the decentralization of power to an additional management layer.

2.6.1.3 Lesotho definition

In Lesotho, the MTICM (2008) White Paper on the development and promotion of small businesses defines a small business as “a firm that is independently owned and owner- managed and has a small market state.”

It classifies businesses as micro, small or medium based on staff numbers:

 Micro enterprises—fewer than 3 staff members

 Small enterprises—3-9 staff members

 Medium enterprises—10-49 staff members

The above information has shown that difficulties in coming up with a singular universally accepted definition of SMME seems largely due to descriptors for micro, very small, small, and medium enterprises differing from country to country and even within countries. An operational definition for the purpose of this study is therefore necessary.

2.6.1.4 Operational definition of SMMEs

For the purpose of this study, a business is considered an SMME if it fulfills one or more of the following criteria:

 Fewer than 200 employees

 Annual turnover of less than R5 million

 Capital assets of less than R2 million

 Independently owned

 Direct involvement of owners in the management of the business.