Financing Preferences in Microenterprises: Evidence on Internal Vs. External Funding and Behavioral Determinants

This study investigates financing preferences in microenterprises, focusing on the use of internal and external sources of capital and behavioral determinants in financial decision-making. Microenterprises constitute a fundamental component of modern economies; however, their capital structure remains underrepresented in the empirical literature, which predominantly concentrates on larger firms. Addressing this gap, the paper analyzes financing behavior of microenterprise owners within the context of constrained access to external capital. The results indicate a clear predominance of internal financing, primarily retained earnings and owners’ personal savings, used to support operations and smaller investment activities. External financing is employed more selectively and is generally associated with projects requiring higher capital expenditures. This pattern suggests a hierarchical approach to financing consistent with the pecking order theory and reflects constraints faced by microenterprises. The findings also demonstrate that behavioral factors, particularly attitudes toward indebtedness, play a significant role in financing decisions. Lower debt aversion is associated with a higher propensity to use external funding, whereas financial knowledge does not exhibit a statistically significant effect. The study contributes to the literature by integrating structural and behavioral perspectives and provides implications for policymakers and financial institutions seeking to improve access to finance for microenterprises.