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

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