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Formal and informal financing decisions of small businesses

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  • Bach Nguyen

    (Aston University
    University of Economics Ho Chi Minh City)

  • Nguyen Phuc Canh

    (University of Economics Ho Chi Minh City)

Abstract

This study investigates small businesses’ financing decisions. Drawing upon asymmetric information theory, institutional theory and relevant literature on cognitive financial constraints, human capital and social capital, we propose a theoretical framework in which financing determinants come from three dimensions: entrepreneurs’ individual factors, organisational (firm-level) factors and contextual (institutional) factors. We employ this model to distinguish four types of firms: (1) firms that use no external finance, (2) firms that use informal finance only, (3) firms that use formal finance only and (4) firms that use both formal and informal finance. An empirical test on Vietnamese small businesses shows that factors from all three dimensions are important in understanding small businesses’ financing decisions.

Suggested Citation

  • Bach Nguyen & Nguyen Phuc Canh, 2021. "Formal and informal financing decisions of small businesses," Small Business Economics, Springer, vol. 57(3), pages 1545-1567, October.
    • Handle: RePEc:kap:sbusec:v:57:y:2021:i:3:d:10.1007_s11187-020-00361-9
    DOI: 10.1007/s11187-020-00361-9
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