Informal financing choice in SMEs: do the types of formal credit constraints matter?
Description
We examine how SMEs choose alternative external finance when their access to formal finance is constrained in an emerging market context. We find that when constraints to formal credit for an SME increase (decrease) over time, the firm's behavior changes accordingly by selectively shifting toward (away from) certain types of informal credit. Specifically, when a firm avoids formal credit because of perceived difficulties in application process, it seeks alternatives from the owner’s family and friends and private money lenders. When the interest rate is perceived to be too high, the firm prefers trade credit and the owner’s family and friends. Trade credit appears to be the most likely substitute of formal finance for firms with bad credit history. Lastly, firms that are denied short-term loans may find emergency funding from private money lenders. Our findings suggest that certain types of informal credit may be more appealing than formal credit in certain cases.
Impact and interest:
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| ID Code: | 241001 |
|---|---|
| Item Type: | Contribution to Journal (Journal Article) |
| Refereed: | Yes |
| Additional Information: | Funding: Hang Thu Nguyen and Hiep Manh Nguyen received funding from the Corporate Finance and Investment Research Project of Foreign Trade University of Vietnam. |
| Measurements or Duration: | 20 pages |
| Keywords: | family and friends, Financial constraints, informal credit, private lenders, trade credit |
| DOI: | 10.1080/08276331.2019.1692441 |
| ISSN: | 0827-6331 |
| Pure ID: | 138318032 |
| Divisions: | Current > QUT Faculties and Divisions > Faculty of Business & Law Current > Schools > School of Economics & Finance |
| Funding Information: | Hang Thu Nguyen and Hiep Manh Nguyen received funding from the Corporate Finance and Investment Research Project of Foreign Trade University of Vietnam. All authors have equal contributions. We would like to thank two anonymous reviewers at the Journal of Small Business & Entrepreneurship, Michael Troege at ESCP Europe, Nguyen Justin Hung at Victoria University of Wellington and participants at VICIF 2019, Le Tuan Bach, Nguyen Thi Hoang Anh, Chu Mai Linh, Nguyen Thi Mai Anh at Foreign Trade University, HCMC Campus for their valuable comments and suggestions. |
| Copyright Owner: | 2019 Journal of the Canadian Council for Small Business and Entrepreneurship/Conseil Canadien de la PME et de l’entrepreneuriat |
| Copyright Statement: | This work is covered by copyright. Unless the document is being made available under a Creative Commons Licence, you must assume that re-use is limited to personal use and that permission from the copyright owner must be obtained for all other uses. If the document is available under a Creative Commons License (or other specified license) then refer to the Licence for details of permitted re-use. It is a condition of access that users recognise and abide by the legal requirements associated with these rights. If you believe that this work infringes copyright please provide details by email to qut.copyright@qut.edu.au |
| Deposited On: | 29 Jun 2023 00:22 |
| Last Modified: | 02 Aug 2024 14:50 |
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