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Microenterprise Development

A Legislative Brief for the Center for State Innovation

Model Legislation for Microenterprise Development
For low-income families, self-employment is a significant source of jobs and income.
Of the 20 million Americans who operate microenterprises, 65 percent are women, 55 percent are minorities, and 59 percent are low-income. These small businesses supplement income from low-wage jobs or create jobs when workers become unemployed. For many low-income Americans, a microenterprise is the most effective way to support their families.
Most low-income workers who want to start microenterprises cannot do so without help.
There is a large unmet demand for microenterprise technical assistance, training, and financing services in low-income communities. Community-based organizations in every state offer some type of microenterprise development program that targets non-traditional entrepreneurs, such as women of color, welfare recipients, immigrants, the disabled, or inner-city residents. But an estimated ten million of U.S. low-income microentrepreneurs do not have access to these programs.[1]
Policies that encourage the creation of microenterprises can help low-income families become economically self-sufficient.
A large-scale study of microentrepreneurs found that 78 percent experienced a substantial rise in income, raising average household incomes from $10,400 to $18,500 in two years. More than 53 percent of low-income entrepreneurs gained enough income to move their families out of poverty, many nearly doubling their family income over five years.[2]
Microenterprise development programs are cost-effective investments that create jobs and reduce reliance on public assistance.
A recent study showed that about 50 percent of microenterprise operators achieved economic self-sufficiency after only 18 months.[3]
According to the U.S. Small Business Administration (SBA), businesses created by low-income entrepreneurs have high survival rates. Sixty-eight percent are still in operation after two years—slightly higher than the 66 percent survival rate for all small businesses.[4]
Training and technical assistance are the most urgent needs for microentrepreneurs.
In microenterprise development programs, training and technical assistance are in high demand. On average, 89 percent of microenterprise program clients seek and receive training and technical assistance in areas such as business management and economic literacy. Currently, there are only two small sources of federal funding for training and technical assistance services to low-income entrepreneurs. The two SBA programs, the Microloan Program and Program for Investments in Microenterprise (PRIME), provide only about $40 million in funding. The Bush Administration has repeatedly targeted the Microloan Program, which is the larger of the two programs, for elimination. In FY 2006, the Microloan Program was cut by 15 percent and the PRIME program was cut by 60 percent. An SBA program for technical assistance was cut by ten percent.[5]
States are beginning to recognize the need to fund microenterprise development.
Twenty states currently allocate funding for microenterprise program operations, training and technical assistance. Other programs offer direct loans to microenterprises. Vermont’s Job Start Program, the oldest state microenterprise effort in the nation, administers a centralized loan pool through the state Economic Development Authority and uses state funds to support five local community action agencies that provide assistance and training to local entrepreneurs. Louisiana allocated $1 million in TANF funds for microenterprise programs and resource centers statewide. Nebraska’s longstanding microenterprise program created over 500 jobs in 2001 at a cost of only $729 per job. Oregon enacted legislation in 2001 that provides grants, technical assistance, and training to microentrepreneurs.
The Microenterprise Development Act supports nonprofit organizations that provide training and technical assistance to low-income microentrepreneurs.
The Act directs the state economic development agency to create a grant program for nonprofit microenterprise development assistance programs. These programs will provide low-income microentrepreneurs with the support they need to succeed, including business planning, marketing, management, and financial management skills. All state funds must be matched at least dollar-for-dollar by other funding sources.
This policy summary relies in large part on information from the Corporation for Enterprise Development and the Aspen Institute.

Model Legislation

Microenterprise Development Act

Summary: The Microenterprise Development Act establishes a grant program to support training and technical assistance for low-income microentrepreneurs.

This Act shall be called the “Microenterprise Development Act.”

The legislature finds that:
1. Development and expansion of businesses in economically distressed communities in both rural and urban areas can assist residents who are unemployed, underemployed or in low-income jobs.
2. Microenterprises provide a means for unemployed, underemployed or low-income individuals to find and sustain productive work, and they provide opportunities for economically distressed communities to thrive.
3. Low-income microentrepreneurs lack access to capital, training and technical assistance. Many low-income microentrepreneurs need lending services and technical assistance to start, operate or expand their businesses.
4. Local microenterprise support organizations have demonstrated cost-effective delivery methods for providing lending services and technical assistance.
5. Charitable foundation support, federal program funding and private sector support can be leveraged by a statewide program for development of microenterprises.
This law is enacted to strengthen the [State] economy and enable low-income residents to become self-sufficient by encouraging microenterprise development.
After section XXX, the following new section XXX shall be inserted:
In this section:
1. “Secretary” means the Secretary of the Department of [Economic Development].
2. “Microenterprise” means a sole proprietorship, partnership, or corporation that has fewer than five employees and generally lacks access to conventional loans, equity, or other banking services.
3. “Microenterprise development organization or program” means a nonprofit entity or a program administered by such an entity, including community development corporations or other nonprofit development organizations and social service organizations, that provides services to low-income microenterprises.
4. “Training and technical assistance” means services and support provided to low-income owners and operators of microenterprises, such as assistance for the purpose of enhancing business planning, marketing, management, financial management skills, and assistance for the purpose of accessing financial services.
5. “Low-income person” means a person with income adjusted for family size that does not exceed:
a. For metropolitan areas, 80 percent of median income; or
b. For nonmetropolitan areas, the greater of 80 percent of the area median income or 80 percent of the statewide nonmetropolitan area median income.

1. The Secretary shall establish a microenterprise technical assistance and capacity building grant program to provide assistance in the form of grants to qualified organizations.
2. A qualified organization shall use grants made under this program to provide training and technical assistance to low-income entrepreneurs.
3. To be eligible for a grant, a qualified organization shall be a nonprofit microenterprise development organization that has a demonstrated record of delivering services to low-income individuals.
4. The Secretary shall ensure that not less than 50 percent of the funds made available are used to benefit persons whose income, adjusted for family size, is not more than 150 percent of the poverty line as defined in 42 U.S.C. 9902(2).
5. A qualified organization must provide at least one dollar in matching funds for every dollar of state financial assistance. Fees, grants, and gifts from public or private sources may be used to comply with the matching funds requirement.
6. The Secretary shall establish by regulation such requirements as may be necessary to carry out this section.

During fiscal year 2008, [$XXXXX] is authorized to be appropriated to the Secretary to carry out this Act.

This Act shall take effect on July 1, 2007.

[1] Britton Walker and Amy Kays Blair, “2002 Directory of Microenterprise Programs,” Aspen Institute, 2002. 
[2] Joyce Klein, Ilgar Alisultanov and Amy Kays Blair, “Microenterprise as a Welfare to Work Strategy: Two-year Findings,” Aspen Institute, 2003. 
[3] Women’s Initiative for Self-Employment, “Women’s Initiative Measures Up: A Report on the Post-training Outcomes for Microenterprise Training Recipients from 1999 to 2002,” April 2004. 
[4] “Microenterprise as a Welfare to Work Strategy.” 
[5] Center for Rural Affairs, “Congress Finalizes FY 2006 Budget: Asset-Building Programs Protected,” February 2006.