Microenterprise financing preference

Abstract

PurposeThe purpose of this paper is to investigate the determinants of financing preference of micro and small enterprises (MSEs) whilst distinguishing a broader range of financing sources beyond what is typically the case within the corporate finance literature.Design/methodology/approachUnder the framework of ordinal logistic regression, the paper also tests whether there is evidence of hierarchical preference ordering as predicted by pecking order theory (POH) using field survey data for 2009.FindingsThe authors relate that new enterprises are more likely to prefer low cost and less risky or less formal financing such as internal or bootstrap finances. However, as the enterprise gets established or matures, its capacity to seek formal financing increases, thereby becoming more likely to prefer or being in a higher category of formal financing. While the paper affirms the POH, it is argued that this order is a consequence of severe persistent constraints other than sheer preference. The findings further reveal that, microentrepreneur's and MSE's‐specific level socio‐economic characteristics such as owner's education or financial literacy status, households tangible assets, ownership structure, enterprise size, as well as sensitivity to high interest rates in the credit market, to be important determinants of either past (start‐up), present or future financing preference.Originality/valueThe main value of this paper is to analyse the determinants of financing preference of MSEs within the context of rural financial market (RFM) from a developing country perspective.