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Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Formal businesses are registered and covered by relevant legal and administrative arrangements; informal businesses operate outside those arrangements or are covered by them only partly. Formal status can make it easier to use regulated finance, legal services, and business support, but it does not guarantee a loan or make compliance costs worthwhile for every firm. The practical difference depends on the country, industry, business records, and how rules work in practice.
What “formal” and “informal” mean
There is no single definition used for every purpose. The International Labour Organization (ILO) uses a broad definition: the informal economy “refers to all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements,” in its Recommendation No. 204 (2015). This can refer to economic units, workers, or gaps in legal and practical coverage; it does not mean illicit activity.
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The World Bank’s FAQ uses “informal firms” more narrowly to mean unregistered firms. That registration-focused usage is useful when comparing access to services and regulation, but it is not interchangeable with the ILO’s broader definition. A business can be small and formal, and a registered firm’s workers may not all have the same protections.
The scale is substantial, though the figures measure different things. The ILO reports that more than 60% of the world’s workforce and 80% of enterprises operate in the informal economy; its topic page does not state the figures’ reference year. Separately, the World Bank Group estimates that 70% of MSMEs in developing economies lack access to financing; the FAQ page does not state the estimate’s underlying year. These are institution-reported global estimates, not measurements from the same year or of the same population.
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How funding access differs
Formal businesses
Registration and reliable business records can help a firm use formal financial channels. Registered companies may be able to use banks and courts, and access to finance also depends on systems for payments, credit information, and secured transactions. The World Bank’s Business Ready methodology says registered companies benefit from legal and financial services provided by courts and banks.
Formal status is not a loan approval. Lenders may also assess cash flow, credit history, collateral, firm size, sector, and local lending conditions. Registration can open a route to regulated finance without removing those barriers.
Informal businesses
Unregistered firms can face barriers to credit, including limited formal records or difficulty using collateral and regulated financial services. That does not mean they cannot obtain any financing: products and programs may be designed for microenterprises or used to encourage a gradual transition. Availability and eligibility depend on the local market and program.
The ILO describes policy and product examples such as payment platforms that help microenterprises formalize payroll, “graduation” lending that makes larger loans conditional on enterprise status, and additional benefits such as insurance for formal enterprises. These are examples of approaches, not standard offers available to every business.
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What support businesses may be able to use
Support is broader than borrowing. Depending on the country and eligibility rules, it can include skills development, digital tools, business development services, financial intermediaries, public services, and programs that connect firms to markets or regulated finance. The World Bank Group describes these kinds of support for micro, small, and medium-sized enterprises in its MSME finance overview.
Informal firms are not necessarily excluded from all assistance. Tailored microfinance and transition programs may serve them, while some initiatives use access to services or larger loans as an incentive to formalize. The World Bank’s Business Ready business-entry methodology discusses registration services and transparent information; its MSME finance overview also describes business development services and a credit viability fund connecting micro and small enterprises, including women-led firms in an Afghanistan program example, to regulated finance. Such programs illustrate possible support, not universal entitlements.
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What regulation means for each type of business
Formal businesses
Formal firms register and operate within applicable rules. Depending on the jurisdiction and business activity, they may have obligations related to tax, licensing, permits, reporting, or workers. Formal status can also make legal and public services more accessible. The rules, obligations, and benefits vary by country; there is no responsible universal list of filings or licenses for a jurisdiction-neutral comparison.
Informal businesses
Informal firms may be outside, or only partly covered by, formal arrangements. The World Bank identifies unpredictable regulation, costly registration, licensing and permitting barriers, and lack of credit access among the challenges associated with informality in its FAQ on informal firms. These barriers can coexist with weak practical access to public services; a rule on paper does not guarantee that a business can navigate it easily.
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It helps to distinguish the written rules from the institutions that deliver services and the efficiency of implementation. The World Bank’s Business Ready methodology assesses regulatory frameworks, public services, and operational efficiency as separate dimensions. Its business-entry assessment considers regulation, digital public services, transparency of information, and registration time and cost. Two places can therefore have similar formal requirements but very different real-world experiences.
The World Bank reports associations between higher startup costs and lower business entry, employment, and productivity, and between cumbersome startup regulation, corruption, and informality. These are reported associations, not proof that a single rule causes those outcomes in every setting.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Workers’ protections are related to, but distinct from, business registration
The World Bank’s overview notes social security protection for employees of registered companies. More broadly, informal work can involve deficits in decent work and social protection. But a firm’s registration alone does not establish the status or coverage of every worker. Worker protections depend on applicable law and how it is implemented, as well as on the worker’s employment arrangement.
How to assess whether formalization makes sense
Formalization is a transition, not simply a registration event. The ILO describes it as a long-term process involving legal and regulatory reforms alongside measures to boost productivity and wealth creation. For an individual business, the balance depends on local costs, available services, and the opportunities that formal status makes realistically accessible.
- Registration burden: Check the applicable time, fees, permits, and ongoing obligations for the specific location and business activity.
- Finance: Find out which lenders and payment services the firm could actually use, and what records, collateral, or credit history they require.
- Support: Confirm whether relevant training, business development, public services, or market-linkage programs accept firms at the current stage of formality.
- Workers: Identify labor and social-protection requirements separately from the business’s registration status.
- Implementation: Consider whether rules are clear, information and services are accessible, and processes operate predictably in practice.
Because these conditions vary, global evidence does not establish that formalization produces a net financial gain for every enterprise. It can create access and protections while also adding compliance costs; the practical trade-off is local.
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