Self-rationing and small business success: the moderate role of informal finance

Abstract This study investigates the relationship between small business success and formal finance self-rationing by highlighting the moderate effect of informal financing. A structural equation method is realized using questionnaire survey data from a sample of 293 Beninese small business managers. Overall, the study shows that the majority (more than 65%) of small businesses are self-rationed. Almost 40% of respondents have got financing support from their family or friends and about 38% apply for tontine. Additionally, we find that self-rationing negatively and significantly affects small business success. We also find that informal financing moderates the relationship between self-rationing and small business success. Thus, When the managers perceive more guarantees required, high costs, and difficulties in the application process for formal financing, they use informal funding to overcome these difficulties to reach success. Furthermore, our findings suggest that the government should target and organize informal financing, especially tontine. Formal institutions especially banks are to consider interpersonal factors to facilitate the financing conditions for small businesses instead of always focusing their attention only on the classic process to resolve the higher cost of financing problem and reduce the asymmetric information problem.