Analysis of Formal and Informal Sources of Entrepreneurial Financing on the Performance of MSMEs in Lagos, Nigeria

Micro, Small and Medium Enterprises (MSMEs) have been recognised as one of the drivers of economic growth in developed and developing economies. It contributes significantly to employment generation and Gross Domestic Products (GDP). However, in view of the current financial crisis experienced by many economies, due to outbreak of COVID-19 pandemic, many economies have witnessed significant decline in finance flow to MSMEs, thus creating a funding gap for their operations. The study analysed the effect of formal source of finance (Bank Loan) and informal source of finance (Trade Credit) on the performance of MSMEs. The study's objectives are to examine the effect of Bank Loan (BL) on profitability of MSMEs and effect of Trade Credit (TC) on sales turnover. Survey research design was employed on registered MSMEs in Lagos State with a sample size of six hundred and sixty-five (665) determined using Cochran's formula from the population of registered MSMEs in Lagos State. Data were obtained through Primary sources with the use of structured questionnaire using simple random technique. Analysis was done using descriptive and inferential statistics. The results showed that TC had β = 2 0.891; R = 0.828; t-value = 35.642; p < 0.05 while BL with β 2 =0.775; R = 0.638; t-value = 33.894 and p < 0.05; respectively. This revealed that TC has stronger effect on MSMEs' performance than BL indicating that MSMEs make more profit through TC than BL. The study recommends that, financial policy that ensures availability and accessibility of loans to MSMEs through Deposit Money Banks should be developed as well as creating awareness for alternative micro credit schemes that could cushion the effect of Covid- 19 on the performance of MSMEs.