Why Investing in Microenterprise Development Is a Good Economic Development Strategy

What is a microbusiness?

A microbusiness has 5 or fewer employees, including the owner. Microbusinesses are found in every industry from manufacturing to professional services to retail. They represent 92% of all U.S. businesses.[1]

 

What is microenterprise development?

Microenterprise development organizations typically serve minority, low-income, and/or other under-represented entrepreneurs start or grow their existing business through access to capital, technical assistance, training, or other business development services. 

 

How do microbusinesses benefit from microenterprise development services?

Microbusinesses that receive microenterprise development services typically see:

  • Increased revenues. Microbusinesses that receive support services have a 30% difference in average annual revenue growth compared to businesses that did not receive support.[2]
  • Increased owners’ draw. 32% of existing businesses working with an MDO increased their owners’ draw for an average of $7,017 per business.[3]
  • Increased household income. 30% of microentrepreneurs reported higher household income than at intake into the MDO program.[4]
  • Business starts. 55% of aspiring entrepreneurs start their businesses after working with an MDO.[5]
  • Business survival. 94% of businesses receiving support from an MDO were still in a business a year after working together.[6]

What is the impact on microbusiness on the U.S. economy?

Microbusinesses have a tremendous economic impact on the U.S. economy. Microbusinesses are responsible for 26 million jobs and contribute $135.5 billion in taxes and fees to federal, state, and local governments.[7] Microbusinesses not only play an important role in the U.S. economy, but they also significantly impact the owner. From AEO’s The Power of One in Three report, “the median net worth of business owners is almost 2.5 times higher than non-business owners. For a black woman, the difference is more than 10x. For a Latino man, the difference is 5x.”[8]

What is the return on investment to providing microenterprise development services?

For $1 dollar of program costs to assist microbusinesses it generates between $8.96 and $9.45 in increased owner’s draw and wages.[9] Moreover, providing microenterprise development services offers a great return to investors and taxpayers. The cost for assisting one business to start or grow typically ranges between $2,269 and $2,392.[10] This is significantly lower than the typical 5 figure cost to create one job [11] in traditional economic development strategies to recruit large corporations to relocate. A UK study completed for the Department for Communities and Local Government on urban revitalization efforts found that providing general business support provided a 6x return compared to housing and community development activities that only provided a .9x to 3.7x return.[12]

But don’t small businesses have high failure rates?

The idea that small businesses have a high business closure rates is a myth.[13] Business survival rates have been remarkably consistent over the past 20 years and, unfortunately, the data has been misinterpreted for just as long. To be sure, most failures occur during the first two chaotic years of operation, but not at the 90% rate that is often quoted. According to various US databases and surveys, nearly 70% of startups survive the initial two-year period (only 30% fail) and once achieving this milestone, businesses stand a 90%-95% chance of surviving onto the next year. Survival rates for all industries are as follows[14]:

  • Year 1 after startup = 80%
  • Year 2 after startup = 70%
  • Year 3 after startup = 60%
  • Year 4 after startup = 56%
  • Year 5 after startup = 55%
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