smallest sized lettering possible

There are many factors that determine how small letters can be embroidered. For example, you can embroider sans-serif fonts much smaller than serif fonts. Thread weight, needle size, fabric type, upper thread and bobbin thread tension, backing and topping, and an embroidery machine in good working order all must be working in harmony to embroider as precisely as possible to get the desired results.

An experienced digitizer may have digitized the lettering perfectly, but if the embroidery operator is not experienced then the outcome will simply not be satisfactory. If everything is done right, however, lettering embroidered at 5mm is possible.