Firm Finance from the Bottom Up: Microenterprises in Mexico

This study examines the sources of external finance of Mexico's smallest firms, using data from surveys of micro-enterprises undertaken in 1994 and 1998.

The study:

• Identifies sources of start-up capital and provides information on current bank loans and access to trade credit from suppliers;
• Cites evidence that the credit crunch that Mexico experienced in the second half of the 1990s affected micro-enterprises;
• Examines access to informal credit.

The study finds that:

• Firms in the 1998 survey are smaller and have less bank credit than firms in the 1994 survey;
• In both surveys, bank credit represents only a small part of the external finance of firms;
• Informal credit loans from family members and friends - and trade credit are much more common;
• Firms located in states with higher rates of migration to the United States are more likely to receive informal loans;
• Receipt of trade credit is positively correlated with the firm's level of fixed assets and is more common in firms with formal accounting systems.

The study draws the following conclusions:

• Remittances from US migrants may be a source of capital for Mexico's micro-enterprises;
• Information matters in the trade credit markets, and the development of information institutions such as credit reporting bureaus would have beneficial effects for micro-enterprises.