Towards understanding financial decisions in informal microbusinesses:evidence from a developing country

Abstract

Through an integrative perspective, we extend the literature on capital structure of informal microbusinesses. Our approach considers the financing decision and the various financial decisions and their impact on cash generation for personal purposes. A dataset of 892 Colombian informal microbusinesses were explored to identify various business configurations using Multiple Correspondence Analysis and Hierarchical Clustering Method. Through a logistic regression, we regressed the probability of early cash generation for personal purposes on business configurations and initial financing. Four microbusiness configurations emerged: Typical informal, owner-oriented, over-indebted, and informal lenders. Results show that informal microbusinesses are distinctive in terms of their financial decisions. Initial financing provided by formal lenders and payday lenders delay early cash generation. The contrary occurs when initial financing is provided by private informal lenders and to typical informal microbusinesses. Results indicate that different configurations require customized initiatives rather than a “one-size fits all” approach for informal microbusinesses