Therefore, it is important to understand which financing tools are used by these firms, and in which combinations. Although prior research has investigated the financing patterns of SMEs and large firms (Chavis et al., 2011; Masiak et al., 2017; Moritz et al., 2016; Moritz et al., 2015; Lawless et al., 2015), little is known about the financing patterns of micro firms. This lack of research is remarkable, as micro firms differ from other firms in a number of ways, particularly in their ownership structure, resource availability and cost structure. These characteristics directly influence the costs for obtaining external capital and, hence, the financing structure of these companies (Baas and Schrooten, 2006; Binks et al., 1992; Freeman et al., 1983; Nooteboom, 1993; Rao et al., 2008).
We investigate the financing patterns of micro firms in Europe to improve the understanding of how they differ from other SMEs. To this end, we use an EU-wide dataset created from the “Survey on the access to finance of enterprises” (SAFE survey), which is conducted on behalf of the European Commission and the European Central Bank. The survey contains detailed information about a large set of financing instruments as well as firm, product, industry and country information about the 12,144 companies included.
Our results provide evidence for some of our main predictions. Micro firms are less likely to use state subsidies, trade credit or asset-based financing instruments, whereas they are more likely to use internal financing instruments. Also, micro firms differ from medium-sized firms by relying more on short-term bank debt (credit card overdrafts, credit lines and bank overdrafts).