What Is a Microenterprise?

The term microenterprise, also known as a microbusiness, refers to a small business that employs a small number of 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.

Key Takeaways

  • Microenterprises are small businesses that employ a small number of employees—usually fewer than 10 people.
  • Microenterprises are financed by microcredit, a type of credit facility given to people who have no collateral credit history, or employment.
  • These businesses help improve the quality of life for people in developing countries, and generally provide a good or service in their communities.
  • The idea of microfinance and microenterprises was developed by Muhammad Yunus, founder of Grameen Bank in Bangladesh.

Understanding Microenterprises

Microenterprises are small businesses that are financed by microcredit, a type of credit facility given to people who have no collateral credit history, or employment. These businesses serve a vital purpose in improving the quality of life for people in developing countries, and generally provide a good or service in their communities such as clothing and footwear production or agriculture. Microenterprises not only help improve the quality of life for business owners, they also add value to the local economy. They boost purchasing power, improve income, and also 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 benefit their communities. Many banks grant microloans to those in need, but a great deal are provided by organizations that cater specifically to people who want to start a microenterprise. Like regular loans, they are required to pay back the funds over time with interest.

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 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 likely won't grow to a considerable size unless an aggressive strategy is put in place. For instance, a street vendor may operate a cart for making and selling gyros on busy corners. Unless the vendor has the resources to hire others who can perform the same task consistently—and has the assets to acquire more of these carts—scaling the business up the way a quick-serve franchise does is often challenging.

Since the scope of the operation is so tightly focused, the operation may have difficulty growing into an even larger operation. Given their size and resources, microenterprises may also be limited in their access to financial advisors and expertise that may help them better manage their business. While they can afford to operate and provide income to themselves and staff, they may not have the liquidity to procure other services that will aid in their development.

There are ways microenterprises can grow into more established small businesses and 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. This may require buying out rivals who have claimed 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, just like seamstresses, dry cleaners, and private 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.

Critics of microenterprises say high interest rates may push people into a cycle of debt they may not be able to escape.

Examples of Microenterprises

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