Small letters are really hard. You can not really go smaller than 5mm. I suggest finding a good digitizer that specializes in small lettering. As far as tricks go you should have a lighter density and and a littler more pull comp.
If you look at the thickness of a needle ..... remember that the columns have to be digitized almost twice that thickness in order to have a finished thickness of a millimeter on many fabrics. Add enough pull compensation to make columns thicker without closing in your type. Lower density and manually adjust for push. On underlay and travel stitched use the longest length to get the job done.
The changes required for small text can be many. One thing you can do, is to create some fabric swatch selections, with your best outcomes on different fabrics. Remember that not every font just translates into good small text, so you need to choose just a few to use. It is very difficult to pinpoint one aspect , as numerous factors such as thread/weight/needles/tensions/fabric and actual text content affect what an outcome can be.
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