Microentrepreneurship: concepts, strategies, and outcomes

Micro Entrepreneurship

The concept of micro entrepreneurship to someone in the developed world means making a small loan to a person in the developing world engaged in small business. The business is typically a small production, agriculture or small retail (store, stall) operation. An example would be lending to somebody who runs a small shop and needs money to buy inventory that they can then sell to customers to earn profit.

For the most part, the micro lending model has positive outcomes. For the micro entrepreneur, the financing allows them to start or improve their own business. This in turn breeds independence for the entrepreneur and gives them the opportunity to build their business when otherwise they may not have had access to capital. The biggest downside risk is the risk of default. Entrepreneurial activity is challenging in any country, so for a small entrepreneur such a big loan creates pressure to succeed. For the lender, the amount of money in question is small, so even though default is a risk, it is minimal.

3. In the developing world, micro entrepreneurship would probably just be viewed as entrepreneurship. Certainly the term "micro" applies in the First World, where an entrepreneur might be someone who starts a restaurant or microbrewery or something else that costs tens of thousands of dollars. For "micro" entrepreneurs, the hundreds or few thousands of dollars at stake are an equally large amount, despite seeming "micro" to a Westerner. The credit given in microlending is simply a means by which entrepreneurs in the developing world can fulfill their dreams. An example is the same -- somebody who owns a street food stall, small shop or small industrial enterprise would be considered a microentrepreneur.

4. Microcredit is lending to microentrepreneurs. Essentially, it is credit extended through a facility that allows for lending of amounts that are "micro" in amount. This contrasts with the typical developing world lending facilities, wherein large banks typically would only extend credit to large companies, leaving the local market for credit to small businesses unfulfilled.

5. Microcredit promotes microentrepreneurs in a number of ways. The first, and most important, is that it gives them a source of financing. Normally, small businesses in the developing world will not have any ability to raise credit. What microcredit does is that it allows small businesses to raise capital that can be used to build, expand or improve the business.

Access to credit is a significant barrier to entry for many entrepreneurs, especially in the developing world. Often, people cannot afford to start or expand a business because they have no access to capital. With microcredit, this gap is bridged and entrepreneurs in the developing world can have access to capital. This helps to encourage such individuals to open business, or to expand their business.

Beyond the financial aspects, the psychological aspects of microcredit also are important in fostering entrepreneurial activity in the developing world. Entrepreneurs, who previously knew little support, are likely to respond positively knowing that there are people who believe in their abilities, their integrity and their business model. Sometimes just knowing that people have faith in you can help your motivation to work harder and build the business. Knowing that further capital can be acquired down the road if need be is also critical, because it encourages long-term thinking in the development of the business.

6. International development is aided by microlending and microentrepreneurship as well. Economic growth in the developing world depends largely on foreign direct investment, which is a transfer of wealth from one region to another. What microlending does is direct FDI to small businesses, whereas the normal global financial system only directs these flows to large companies. Ultimately, it is important that foreign capital flows find their way to small businesses and to consumers, spurring consumer spending. By creating stronger small businesses and therefore infusing more capital into small and rural communities, microlending and microentrepreneurship foster development on the small scale. The impact of this, however, is economic growth in the developing world and more economic activity in general.