Formal businesses are registered and operate within applicable legal and regulatory arrangements; informal businesses are not covered, or are insufficiently covered, by those arrangements. Formal status can make it easier to use regulated finance, public services, and legal protections, but it does not guarantee a loan or make compliance costs worthwhile for every business. The practical differences depend on the country, the business, and how rules are implemented.
What do “formal” and “informal” mean?
There is no single definition used for every purpose. The International Labour Organization (ILO) describes the informal economy broadly as economic activity by workers and economic units that are “in law or in practice” not covered or insufficiently covered by formal arrangements. The ILO definition excludes illicit activities; informality does not mean that a business is inherently illegal. ILO Recommendation No. 204 (2015)
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The World Bank sometimes uses a narrower, registration-based meaning: its FAQ describes informal firms as unregistered firms. That shorthand is useful when discussing business registration, but it does not capture every worker or enterprise whose activity is insufficiently covered in practice. World Bank FAQ
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Formality is not the same as business size. A small enterprise can be registered, and a large or economically significant activity can remain partly informal. Nor does a company’s registration alone determine the protections or obligations of each worker.
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How do funding and financial access differ?
Registration and reliable business records can help a company use formal financial services. Registered companies may be able to access legal and financial services through institutions such as courts and banks, while informal firms can encounter barriers to credit. The World Bank summarizes the potential advantage this way: “Registered companies benefit from a variety of advantages, including the legal and financial services provided by courts and banks.” World Bank Business Ready methodology
That is an opening, not a promise of financing. Lenders also consider factors such as a firm’s records, size, sector, collateral, and the local credit market. Access to finance also depends on more than whether a bank is willing to lend: payment systems, secured transactions, and the availability of credit information shape how firms make and receive payments, offer collateral, and establish credit histories. World Bank financial inclusion
For scale, the World Bank Group’s FAQ reports an estimate that 70% of micro, small, and medium enterprises (MSMEs) in developing economies lack access to financing. The page does not state the estimate’s underlying reference year, so this should not be read as a measurement for 2026. It is a separate measure from estimates of how much of the global workforce or how many enterprises operate informally. World Bank FAQ
Can an informal business get a loan?
It may be possible, but the route and terms depend on the local market and lender. A business without registration or formal records may have fewer ways to document its activity or qualify for regulated credit. Tailored finance and programs designed to help businesses transition can also serve informal enterprises; they are not necessarily excluded from all support.
Some policy and product designs try to make formalization more useful to a business. The ILO gives examples including payment platforms that can 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 possible approaches, not standard offers or guaranteed benefits. ILO, financing mechanisms for formalization
What support can registered and informal businesses access?
Support can mean much more than a business loan. Depending on the country and eligibility rules, it may include public services, business development services, skills development, digital tools, financial intermediaries, or connections to markets and regulated finance. Registration may help a firm meet the conditions for some programs, but it does not guarantee eligibility or access.
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Informal businesses can also receive tailored support, including microfinance and programs that help enterprises formalize over time. World Bank examples include business development services and a credit viability fund intended to connect micro and small enterprises—including women-led firms in an Afghanistan program example—to regulated finance. These illustrate program designs rather than universal entitlements. World Bank Group, SME finance World Bank FAQ
Before relying on a program, check its current local eligibility rules, which may depend on business size, sector, ownership, registration status, or other criteria. A general claim that “formal firms get support” or “informal firms get none” misses how much programs vary.
What rules apply to an informal business?
Formal businesses operate within the rules and registration arrangements that apply in their jurisdiction. They may gain access to associated legal or public services, but they also take on applicable obligations. The exact requirements—such as registration, tax, licensing, permits, and labor rules—vary by country and sometimes by region, sector, and business activity. Without a jurisdiction, there is no responsible universal checklist of filings, fees, or deadlines.
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Informal businesses are not covered, or are insufficiently covered, by formal arrangements. That does not mean they operate outside every rule or encounter no regulation. The World Bank identifies unpredictable regulation, costly registration, licensing and permitting barriers, and limited credit access among challenges associated with informality. How those pressures are experienced depends on local rules and their enforcement. World Bank FAQ
Why can the same formal requirement feel different from place to place?
A rule’s wording is only part of the experience. The World Bank’s Business Ready framework assesses three distinct dimensions: the regulatory framework (rules on paper), public services (what institutions provide), and operational efficiency (how the system works in practice). For business entry, it considers regulation, digital public services and transparent information, as well as the time and cost of registration. Two places with similar formal requirements may therefore differ in the services available or how predictably and efficiently a business can comply. World Bank Business Ready methodology
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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 relationships, not proof that a single rule or cost causes a particular outcome by itself. World Bank Business Ready methodology
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What does business formality mean for workers?
Workers in informal economic activity may face deficits in decent work and social protection. The World Bank’s overview notes social security protection for employees of registered companies, but firm registration and an individual worker’s status are related rather than identical. Do not assume that every worker at a registered business has the same coverage, or that every worker connected to an informal enterprise has none; actual protection depends on the applicable system and employment arrangement. ILO, informal economy World Bank FAQ
Is formalization always worth the cost?
No universal financial verdict follows from registration alone. Formalization can improve access to institutions and services, but a business must weigh those potential benefits against registration costs, licensing and permitting, ongoing compliance, and the actual availability of credit or public services where it operates. The sources establish patterns and policy examples, not that every enterprise will gain more than it spends.
The ILO describes formalization as a long-term process requiring legal and regulatory reform alongside measures to boost productivity and wealth creation. That matters because a registration event by itself may not resolve weak access to services, difficult compliance, or limited business capacity. ILO, informal economy
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For a particular business, compare its local situation across these areas rather than assuming formal status has the same value everywhere:
- Entry: What are the actual registration time, costs, and steps for this business type?
- Finance: Do local lenders or programs require registration, records, collateral, or a particular transaction history?
- Services: Which public, business-development, skills, or market-linkage programs are available, and what are their eligibility conditions?
- Workers: What social protection and labor obligations apply to the business and its workers?
- Implementation: Are requirements and services predictable and accessible in practice?
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’ underlying reference year; they are global estimates and should not be treated as a current-year count. ILO, informal economy
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