#142. Microfinance and Microenterprise

In this country, microenterprises are companies with five or fewer employees that need up to $35,000 to start up or expand. Microenterprise borrowers are entrepreneurs who have insufficient credit history, need a loan smaller than the usual small business loan or do not meet other lending criteria of traditional financial service providers.

The Association for Enterprise Opportunity, an industry trade organization, puts the number of total U.S. microenterprises at 21.5 million. Approximately 10 million of these microentrepreneurs are individuals who face barriers to mainstream finance and business development services. This group is largely composed of women, people of color, ethnic minorities, the disabled and individuals on welfare interested in starting a business. In addition, an untold number of microentrepreneurs operate in the growing informal economy, the set of economic activities that are considered legal but not in accordance with industry regulations and tax laws. That economy is estimated to represent approximately 10 percent of the U.S. gross domestic product and includes both employed and self-employed individuals.

An increasing number of companies are downsizing, hiring more temporary workers and outsourcing. The growth of nonpermanent jobs translates into a shrinking financial safety net. This is especially true in rural communities, which continue to face economic decline. An aging U.S. population exacerbates this destabilization by reducing the size of the workforce while placing greater demands on the social infrastructure.

Microenterprise development helps address this destabilization by increasing employment among the unemployed and underemployed. These jobs are important beyond the paychecks they provide because they serve as a training ground for future employment. From a macro perspective, microenterprise is significant because it is the precursor to small business-the backbone of the U.S. economy-and generates 17.2 percent of the country’s private employment.

Asset accumulation is another function of microenterprise development. Microenterprises generate income for entrepreneurs and their families, enabling them to build their assets. One direct benefit of asset accumulation is the reduction of dependence on public assistance. As microenterprise helps decrease dependence on public assistance, it raises tax revenues by increasing the number of workers. The growth of microenterprises also increases sales for regional businesses that supply goods and services to microentrepreneurs and their households, further boosting sales tax revenues.