Financing preferences and practices of Indian SMEs

Abstract Using survey data from 309 small and medium sized enterprises (SMEs) from the northwest region of India, this study examines the financing preferences and practices of these SMEs. It also investigates the differences in the financing preferences across firm and owner/manager characteristics and documents the drivers of financing practices in India. Respondents prefer internal funds followed by bank financing mainly in the form of long-term loans and funds from government and financial institutions. Among informal sources, SMEs prefer trade credit followed by funds from family friends, relatives, and money lenders. The least preferred source of financing is external equity. The study contributes to the extant literature on SME financing by comparing the financing preferences and practices of SMEs and identifying a financing gap. By providing a holistic view of financing sources to SME owners and managers, the study can assist policymakers in designing appropriate policies for these individuals and help identify underutilized financing sources for SMEs.