Microenterprise: Definition, Types, Example

What Is a Microenterprise?

Microenterprises, also known as microbusinesses, refer to small businesses that employ few people. A microenterprise usually operates with fewer than 10 people and is started with a small amount of capital advanced from a bank or other organization. Most microenterprises specialize in providing goods or services for their local areas.

Understanding Microenterprises

Microenterprises are small businesses that are financed by microcredit, a small loan available to people who have no collateral, credit history, savings, or employment history. The modest loans are often sufficient to get a small local business off the ground.

These businesses serve a vital purpose in improving the quality of life for people in developing countries and generally provide a product or service in their communities. Microenterprises not only help improve the quality of life for business owners, but they also add value to the local economy. They can boost purchasing power, improve income, and create jobs.

Microfinance seeks to help microenterprises by loaning small amounts of capital to these businesses. This allows individuals or families with moderate, low, or no income to start their own businesses, earn income, and contribute to their communities.

Many banks grant microloans to those in need, but many are provided by nonprofit organizations that cater specifically to microenterprises. Like regular loans, repayment with interest is required.

The idea of microenterprises and microfinance was developed in the late 1970s in Bangladesh as a way to provide people in need with a way to sustain themselves and their families financially and economically. Muhammad Yunus developed Grameen Bank in 1976 to provide microloan financing to impoverished people—many of them women.

Since then, a number of organizations have developed microenterprise programs, many catering to people in developing nations.

Special Considerations

Because microenterprises are small, the presumption is that they won't grow unless an aggressive strategy is put in place. For instance, a vendor may operate a cart to make and sell gyros on busy street corners.

Unless the vendor has the resources to hire others who can perform the same task consistently—and the assets to acquire more carts—scaling the business up the way a fast-food franchise does is challenging.

Since the scope of the operation is so tightly focused, the business may be unable to grow. Given their size and resources, microenterprises can also be limited in their access to financial advisors and expertise that would help them better manage their businesses. While they can afford to operate and provide income to themselves and staff, they may not have the liquidity to expand.

There are ways microenterprises can grow into more established small businesses and even larger companies. If they can secure the financial resources, one approach is to acquire multiple comparable businesses and then combine them into a larger entity that operates across several distinct areas. This may require buying out rivals who have claimed a different territory within a market.

Types of Microenterprises

While individually small in size and scope, microenterprises can collectively represent a substantial portion of the economy and employment. Types of businesses that are considered microenterprises include the following:

• Lawn and landscaping companies
• Street vendors
• Carpenters
• Plumbers
• Independent mechanics
• Machine shop operators
• Shoemakers
• Small farmers

Bakery owners and caterers may be counted as microenterprises, as can seamstresses, dry cleaners, and tailors.

Criticism of Microenterprises

People who support microenterprises and microcredit say these opportunities give people an escape from poverty, providing them with viable employment opportunities and a regular income.

But critics say differently. They claim the concept of microenterprises may force people into debt. Loans come with interest—rates are often high because the recipients may not have any collateral or credit history—which means paying them off may take longer.

Some recipients may even use the funds advanced for purposes other than starting their own business.

Example of a Microenterprise

A woman in a developing country may use microcredit to take out a loan and use the proceeds to purchase a sewing machine. She could use the machine to establish a microenterprise that specializes in tailoring. The woman would increase her income and help her community by providing a service.

The Bottom Line

Microenterprises are important in helping establish and grow local economies, particularly in developing nations. The key component is microloans, which new businesses rely upon to get started when traditional means of credit are not available to them.

These businesses have a positive impact on local economies, providing needed goods, services, and jobs, significantly improving the lives of the people in the community.