What Is a Micro Business? Everything You Need to Know

What Is a Micro Business? Everything You Need to Know

Microbusinesses are the most common business type the world over, and they make up a crucial part of the United States economy. Up to 2016, over 4 million employers in the country were from the microbusiness sector, making up 75 percent of the private-sector employers. They are also responsible for providing more than 10 percent of jobs in the private sector.

You may know that microbusinesses are important, but do you know what they are? These businesses work much like other small businesses, but with some important caveats. Read on to learn more.

What Is a Micro Business?

The term microbusiness, also microenterprise, was coined to describe a small business that requires little startup capital and employs few people. The descriptions can vary from state to state or across jurisdictions. For example, according to the Small Business Administration (SBA), a microbusiness is an enterprise with 1 to 9 employees. A microbusiness in Vermont is one with less than 5 employees and $25,000 in annual generated revenue.

In other jurisdictions, a microbusiness can define a sole proprietor company with no employees. The defining characteristics – that most people agree with – are the few employees and small amount of required startup capital.

Types of Microbusinesses

As mentioned, microenterprises make up a significant part of the economy. They are everywhere, from local kiosks to contractors. Some examples of microbusinesses include:

  • Bakery owners
  • Caterers
  • Landscaping companies
  • Carpenters
  • Mechanics shops
  • Plumbing contractors
  • Shoemakers
  • Dry cleaners and tailors
  • Small-scale farmers

Microbusinesses Vs. Small Businesses

Microenterprises are often likened to small businesses but are actually a subset of them. In the manufacturing industry, small businesses are described as those with 50 employees or fewer. In contrast, a company that generates annual revenue of $6 million or less is considered a small business in the retail and service sector. The SBA sets the definitions for small and micro businesses because this distinction is important when vetting businesses for government contracts and loans.

Besides the size, another difference between microbusinesses and small businesses is how each enterprise is taxed. This usually depends on how the company is registered with the state. Most small businesses are corporations or LLCs and are taxed as a pass-through entity or corporation.

On the other hand, many microenterprises register as a sole proprietorship, which means they don’t have to register with the state. Consequently, they are taxed per the business owner’s personal income tax rates, allowing the owner to deduct business expenses from their tax returns.

Understanding the Micro Business

Microbusinesses are small businesses that offer a particular product or service at a relatively small scale within the community. They are often run by families and can improve income, purchasing power, and employment opportunities locally. For context, think of the family-owned laundromat in your area run by the owner and two or three employees.

A microbusiness will usually require little capital to start, considering they don’t have many employees with high rent overhead costs. If such a business needs funding, they can apply for microcredit, a small loan given to people with no savings, employment record, credit history, or savings.

How to Get a loan for a Micro Business

As mentioned, microbusinesses may apply for a small loan, called microcredit. This amount is usually under $50,000 and made available through the Small Business Administration (SBA’s) microloan program. The microbusiness owner applies for the loan through a microlender working with the SBA and uses it to finance their business. These microlenders sometimes provide education programs and training on financial planning.

It is not always easy for microenterprises to get startup or expansion loans from traditional lenders. This is because these lenders don’t often offer small loan amounts and may consider microbusinesses high-risk due to their lack of capital.

Tip: If you don’t qualify for a microloan, consider applying for a small loan at a local credit union, local bank, or peer lender.

How to Start a Micro Business

Step 1: Craft a Mission and Vision Statement

Your mission and vision statement will outline your core values and present a base from which your business will grow. It will also convince investors and customers to associate with your brand.

Step 2: Create a Business Plan

With your mission and vision statement in place, you should formulate a business plan that covers the following areas:

  • Your business location
  • Your business structure
  • Your key suppliers and partners (investors)
  • The capital you need
  • Your target audience
  • Your revenue stream

Step 3: Draft a Financial Statement

Next, formulate a projected income statement, cash flow statement, and balance sheet. These documents, which make up your financial plan, will help you convince investors and lenders to finance or invest with you.

Step 4: Test Your Product

Before you disseminate your product or service, prepare a prototype and avail it to your customer to get their perspectives on it.

Step 5: Come up with a Marketing Strategy

With the information from your prototype survey, customize a marketing strategy for your product or service. Your approach should include both physical advertisements and online strategies like SEO and email marketing.

Step 6: File Your Business

Finally, register your business with the state. Consider working with a professional filing service or attorney during this stage to ensure you don’t miss any crucial steps. You can now open your business.

Advantages and Disadvantages of a Micro Business

Advantages

  • Micro Business owners work in different areas of the same company (sales, accounting, marketing, etc.), allowing them to build their experience.
  • A microbusiness operates on a smaller scale, allowing it the benefit of quicker decision and strategy turnaround times.
  • Micro Business owners have the freedom to choose which career to venture into and can easily change their minds due to the relatively small investment.
  • The overall cost of operation is very low because small businesses hire few employees and, as such, few salaries to pay.
  • If a small business operates remotely or online, the business owner need not worry about rent.

Disadvantages

  • Small business owners oversee many of the ‘departments’ within the company and face more responsibilities. They have to screen employees, track the finances, pay vendors and landlords, and pay the employees.
  • Many lenders consider microbusinesses as high-risk and often deny them funding. This attitude is based on the fact that these businesses may not record a profit within three years.
  • Microbusinesses, like other companies, face the risk of failure.
  • Microbusiness owners that don’t get funding may find it hard to secure employees.
  • It is more complicated to grow the business’s customer base because of the lack of a marketing team or department. This can make it difficult for microbusinesses to compete in the high-stakes market.

Key Points

A microbusiness or enterprise is a type of small business that hires few employees and requires relatively little startup capital. These enterprises are often funded through microcredit, a specialized type of credit offered to people with no credit history, employment record, or collateral. Despite the challenges they face in terms of funding, micro businesses make up an essential part of the economy. They provide much-needed services within the community.