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Small Things Really Matter: The Important Role of Microenterprise in Job Creation

April 2011

Alicia Williams: Welcome to the Federal Reserve Bank of Atlanta's Economic Development podcast series. I'm Alicia Williams, vice president of community development and policy studies at the Federal Reserve Bank of Chicago.

Economic development strategies that create new jobs are in high demand in light of the recent economic downturn. Microenterprises can play an important role. Microenterprises are often sole proprietorships, but with access to training, support, and financing. Individuals have been able to launch and grow their own microenterprises into operations that increase not just their family's income, but also create new jobs in their communities. As the industry matures, practitioners increasingly focus on the conditions that foster and the resources required for microenterprises to provide high-quality jobs.

Today, we are speaking with Connie Evans, who is the president and CEO of the Association for Enterprise Opportunity, a nonprofit trade association with over 450 member organizations. This group represents the U.S. microenterprise development industry and creates economic opportunity for underserved entrepreneurs. Ms. Evans is an international development consultant with more than 25 years' experience in 43 countries. She has been recognized by and worked for groups that include the World Bank, the Clinton administration, and many local government and private- and independent-sector organizations.

photo of Connie EvansMs. Evans, thank you for joining me today.
 
Connie Evans: Well, it's just a pleasure. Thanks for the opportunity, Alicia.

Williams: What is the definition of a microenterprise? Do we have an estimate of the number of microenterprises nationwide? And are microenterprises concentrated in specific communities, such as urban versus rural?

Evans: A microenterprise is a small business with five or fewer employees with the initial capital needs under $50,000. But really, these businesses often have up to nine or 10 employees and are still considered micro. We often refer to these businesses as "Main Street" businesses. They actually represent 88 percent of all businesses in the U.S. Nearly nine out of 10 businesses are microenterprise, and that's about 25 million businesses. About 21 percent of the U.S. population is employed by a microenterprise, which is more than 32 million people. And our analysis of employee data indicates that 25 percent of employment in rural areas is in microenterprises, and it's about 20 percent in urban areas.

Williams: So, why are microenterprises particularly important to minority and low- and moderate-income communities?

Evans: For the business owner, it's a way to use their talent for productive use and create a livelihood for themselves and their families. They're able to create employment for other members of the community. And microenterprise development promotes local ownership. Having that local ownership is so important. It can lead to greater community wealth as well as individual wealth. It allows a springboard for community leadership, as well as ownership of other assets in the communities, like homeownership.

Because of the smaller inputs needed to start a microbusiness, such as a smaller loan size or less inventory requirements, there are fewer barriers to entry into business. So it really is a great opportunity for minority and low- and moderate-income individuals to start businesses.

Williams: How do people finance microenterprises, and has the financing model changed as a result of the recent economic downturn?

Evans: The vast majority of these businesses are financed through credit cards, or cash from other means—like, many of them are employed and so some of them may be taking the money from their employment to actually start their business. We know that about 10 percent of payday loans or small-dollar loans are actually used for business activity. Even people who borrow from credit unions often are using those funds to start a small business or to finance their business. So, some of those things, of course, haven't changed, except we know people may not be using their credit cards as much.

Now, our members (microlenders who are community development lenders are providing financing to these Main Street businesses. The Association for Enterprise Opportunity members exist in every state and reach hundreds of thousands of microenterprises with loans and other business services. What we see now is, demand is clearly increasing from people who may not be low- or moderate-income, but they do represent an underserved population for business financing because they can no longer qualify for bank financing—some of the banks have tightened their lending qualifications and requirements.

Williams: So, while some microenterprises are intended to grow into larger firms, many can be characterized as "lifestyle" firms. What is a lifestyle firm? Do most microenterprises remain lifestyle firms or grow into larger firms? And, is it common for microenterprise owners to have another job in addition to running their microenterprise?

Evans: A lifestyle firm is simply a business that has decided to focus on making a reasonable livelihood for themselves and their family rather than being focused on high growth. They typically have growth rates below 20 percent annually, and their revenues are much less than a million dollars. Most microenterprises do remain small, but there are efforts within our sector that are focused on helping businesses to grow into these $1 million businesses. Often, we see that the owners of these microenterprises continue to work a job while their business is getting started. Now, in many cases, that can be a very wise decision because they are doing that to try to mitigate some of the risks that they see in having no income while they are trying to get their business off the ground. Oftentimes while the business is working, people might maintain a part-time job and set a goal of where their revenues and where the business needs to be in terms of when they'll make the decision to actually drop that employment.

Unfortunately, what we are seeing now because of the shortage of jobs, many people just don't have that opportunity, they don't even have an option to do both. They are having to get a business started, work that business quickly, and try to generate a livelihood from it right away.

Williams: With respect to job creation, what is the track record of microenterprises?

Evans: Actually, quite good. About 20 percent of all private-sector nonfarm employment is in a microenterprise. The average payroll amount per employee in a microenterprise, just for an example, was $39,600 in 2008, and that was nearly three times higher than what a minimum-wage job paid in 2008. So, the payroll amount per employee for U.S. microenterprises is strong. It increased more than 15 percent from 2005 to 2008, and when you compare that for nonmicroenterprises over the same time period, that increase was only 10 percent.

When you look particularly at the entrepreneurs who are disadvantaged or don't have access to typical resources—minorities, veterans, etc—when you look at their job creation, we see that it is on par with job creation by non-underserved businesses. Both, on average, create about 3.5 jobs, and we know that that employment really grows over time. Our latest analysis shows if 1 in 3 microenterprises hired one employee, the country would be at full employment. That is a powerful potential that microenterprise holds for helping the American economy to bounce back.

Williams: In light of the recent economic downturn, has there been an increased interest in microenterprises, particularly among those who have faced long periods of unemployment?

Evans: High unemployment is certainly driving an increase of people to self-employment. I think people call it being pushed into self-employment and business start-ups. Our members report sharp increases in demand for services to assist with business planning and business start-ups. It's not necessarily a push, initially, for loan capital—and that's what we often hear about, is the loan capital. People need and recognize the need for technical assistance or training in how to actually start up and set up a business, how to manage that business, how to transition from being an employee to now being a business owner and understanding the taxes and their bookkeeping.

Williams: Connie, one last question. How can economic development organizations better address the needs of microenterprises in their communities and incorporate microenterprise development into a comprehensive job creation and economic development strategy? Are there models of effective economic development programs that address microenterprise development?

Evans: We should really encourage local communities to use an ecosystem approach, where all the elements that are necessary to support a thriving and vibrant business community are brought to bear. That's looking at, how do you get universities focused and participating in microenterprise development? They have talent there, they have technology there, and that can be leveraged to support and provide additional services to microentrepreneurs. You have the private sector unbundling contracts so that microenterprises have a better chance of accessing contracting opportunities. The same can be said for government entities.

These companies need real smart market data. They need someone who can actually do market trend analysis for them. They need assistance in helping to figure out where there are new opportunities.

We are seeing some really dynamic models coming out of places like Portland, Oregon, for example, where one of our state microenterprise associations is working very closely with government and other leaders in that community in something that is being called "economic gardening." The Mayor of Portland is promoting an economic gardening concept that recognizes that it's much better to grow—to "garden," if you will—your economy from the ground up, and incorporating policies and other practices to support microenterprise, local business ownership. [And there are] programs in Cleveland that have the universities and all the sectors together focused on really growing local businesses and creating jobs through microenterprises and cooperatives.

Williams: Well, Connie, thank you very much for joining us today.

Evans: Thanks for the opportunity. It really has been my pleasure.

Williams: This concludes our podcast. We've been speaking with Ms. Connie Evans, president and CEO of the Association for Enterprise Opportunity. For more podcasts on this topic and others, please visit the Atlanta Fed's website at www.frbatlanta.org. If you have comments or questions, please e-mail podcast@frbatlanta.org. Thank you for listening.