Analysis of External Financing Use: A Study of Small and Medium Enterprises in Malawi

Abstract

This study analyzes whether firm characteristics including firm size, firm age, availability of information, firmgrowth and industry significantly determine SMEs’ use of external financing or not and whether there aredifferences in the use of external financing between firms of different sizes and industries or not. Using firmlevel data from the World Bank Enterprise Survey, a fractional logit regression model was employed. Theresults indicate that firm size, availability of information and firm growth significantly determine the use ofexternal financing, while firm age and industry are not important in determining the use of external financing.The results also indicate that there are significant differences in the use of external financing between small andmedium firms, with small firms using less external financing compared to medium firms. The results suggest aneed for interventions that take into account firm size example of such intervention is the special financingscheme that targets firms of different sizes. This may help those firms with difficulties to easily access externalfinancing. The results also suggest a need for interventions that encourage SMEs to have proper financialinformation.