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Publication

Firm Finance from the Bottom Up: Microenterprises in Mexico

work, Entrepreneurship, and finance

How do the smallest firms in Mexico finance their operations? We examine this question using data from surveys of microenterprises undertaken in 1994 and 1998. The survey identifies sources of startup capital, and also provides information on current bank loans and access to trade credit from suppliers. There is evidence that the credit crunch experienced by Mexico in the second half of the 1990s affected microenterprises. Controlling for differences in sampling as carefully as possible, we find that firms in the 1998 survey are smaller and have less bank credit than firms in the 1994 survey. In either survey, bank credit represents only a small part of the external finance of the firms. Informal credit—loans from family members or friends, and trade credit—and trade credit are much more common. We also examine access to informal credit, finding that firms located in states with higher rates of migration to the United States are more likely to receive informal loans. This suggests that remittances from US migrants may be a source of capital for Mexico’s microenterprises. We find that receipt of trade credit is positively correlated with the firm’s level of fixed assets, and is more common among firms with formal accounting systems. The latter result suggests that information matters in the trade credit markets, and that development of information institutions such as credit reporting bureaus would have beneficial effects for microenterprises.

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Author(s)
Christopher Woodruff
Publication Date
November, 2001