General de Jesus College

San Isidro, Nueva Ecija

A COMPARATIVE ANALYSIS OF FORMAL AND INFORMAL EXTERNAL

FINANCING DECISIONS AMONG MICRO-BUSINESSES
IN CABIAO, NUEVA ECIJA

_________________________________________________________

An Undergraduate Research Presented to the

Faculty of the College of Accountancy
of General de Jesus College

_________________________________________________________

In Partial Fulfillment of the Requirements for the

Degree of Bachelor of Science in Management Accounting

By:

Buenaventura, Enrico Luis D.

Espiritu, John Inigo D.
Fernando, Justine C.
Hipolito, Reanne Nicole M.

May 2024
General de Jesus College
San Isidro, Nueva Ecija

Approval Sheet

Acknowledgement
General de Jesus College
San Isidro, Nueva Ecija

Dedication
 General de Jesus College
San Isidro, Nueva Ecija

TABLE OF CONTENTS
Title Page . . . . . . . . . . . . . . . . . . . . . . . . i

Approval Sheet . . . . . . . . . . . . . . . . . . . . . .

ii
 General de Jesus College
San Isidro, Nueva Ecija

Acknowledgement . . . . . . . . . . . . . . . . . . . . .

iii

Dedication . . . . . . . . . . . . . . . . . . . . . . . .

iv

Table of Contents . . . . . . . . . . . . . . . . . . . . .v

List of

Tables . . . . . . . . . . . . . . . . . . . . . .vii

List of

Figures . . . . . . . . . . . . . . . . . . . . .viii

Abstract . . . . . . . . . . . . . . . . . . . . . . . . .

ix

Rationale . . . . . . . . . . . . . . . . . . . . . . . . .x

Chapter

1. THE PROBLEM AND ITS BACKGROUND

Introduction . . . . . . . . . . . . . . . . . . . . .

Theoretical Framework . . . . . . . . . . . . . . . .

Research Paradigm . . . . . . . . . . . . . . . . . .

Statement of the Problem . . . . . . . . . . . . . . .

Hypothesis . . . . . . . . . . . . . . . . . . . . .

Significance of the Study . . . . . . . . . . . . . .

Scope and Limitations of the Study . . . . . . . . . .

 General de Jesus College
San Isidro, Nueva Ecija

Definition of Terms . . . . . . . . . . . . . . . . .

2. REVIEW OF RELATED LITERATURE

Review of Related Literature and Studies . . . . . . .

3. RESEARCH METHODOLOGY

Research Method . . . . . . . . . . . . . . . . . . .

Research Locale . . . . . . . . . . . . . . . . . . .

Description of the Respondents . . . . . . . . . . . .

Sample and Sampling Procedure . . . . . . . . . . . .

Data Gathering Procedure . . . . . . . . . . . . . . .

Construction of the Research Instrument . . . . . . .

Validation of the Research Instrument . . . . . . . .

Administration and Retrieval of the Instrument . . . .

Statistical Treatment . . . . . . . . . . . . . . . .

Ethical Considerations . . . . . . . . . . . . . . . .

4. PRESENTATION, ANALYSIS, AND INTERPRETATION OF DATA

5. SUMMARY OF FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

Summary of Findings . . . . . . . . . . . . . . . . .

Conclusions . . . . . . . . . . . . . . . . . . . . .

Recommendations . . . . . . . . . . . . . . . . . . .

Research Output . . . . . . . . . . . . . . . . . . .

References . . . . . . . . . . . . . . . . . . . . . .
General de Jesus College
San Isidro, Nueva Ecija

List of Tables

List of Figures
 General de Jesus College
San Isidro, Nueva Ecija

Abstract

TITLE : “A Comparative Analysis Of Formal And

Informal External Financing Decisions
 General de Jesus College
San Isidro, Nueva Ecija

Among Micro-Businesses in Cabiao, Nueva

Ecija”

RESEARCHERS : Buenaventura, Enrico Luis D.

Espiritu, John Inigo D.
Fernando, Justine C.
Hipolito, Reanne Nicole M.

COURSE & YEAR : BS in Management Accounting 3

ADVISER : Mr. Mark Ruzzel B. Gavino, CPA

SCHOOL : General de Jesus College

_________________________________________________________

Rationale

Access to external financing is vital for the growth

and sustainability of micro-businesses. However, sources of

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San Isidro, Nueva Ecija

external financing can vary widely, ranging from formal

institutions such as banks to informal sources such as

family, friends, and moneylenders. Thus, this study focuses

on comparing micro-businesses’ decision-making in obtaining

external financing for their business, whether they are

obtaining formal or informal external financing, not

obtaining any external funding, and obtaining both formal

and informal external financing for their business. Applying

simple random sampling, and pen-and-paper survey

questionnaires, this study aims to understand the

determinants of financing decisions among different micro-

businesses. Each finding is expected to give a piece of

significant information to the existing literature regarding

the external financing of micro-businesses, give practical

recommendations to policymakers, and substantial facts for

businesses including lending agencies in understanding

decisions in taking external finance.

CHAPTER I

THE PROBLEM AND ITS BACKGROUND

Introduction
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San Isidro, Nueva Ecija

Micro-businesses play a crucial role in various global

economic systems, driving economic growth and providing

employment opportunities worldwide (Mendoza & Tadeo, 2022).

They can be defined as businesses that employ fewer than 10

people, with annual earnings of less than ₱3,000,000.

According to Mcleod (2024), as provided by the Small

Business Administration (SBA), this type of business

structure revolves around a much smaller number of market

participants, and the owners have a much greater connection

with their clients.

As stated in the report from the Department of Trade

and Industry (DTI), micro-businesses constitute nearly

90.49% (1,004,195) of establishments in the Philippines as

of 2022, as part of Micro, Small, and Medium Enterprises

(MSMEs), with the majority relying on external financing in

order to survive. This underscores the importance of

appropriate access to finance, which is a critical part for

micro-business owners to make a decision, since it is a

prerequisite to enable these businesses to provide jobs,

social development, and serve as an alternative to alleviate

unemployment in the Philippine economy (Angeles et. al.,

2022).
 General de Jesus College
San Isidro, Nueva Ecija

Consequently, even though there are some financial

opportunities and the chance to improve their financial

position, studies have revealed that the decision regarding

external funding sources remains a matter of personal choice

for business proprietors. A significant number of micro,

small, and medium enterprises (MSMEs) demonstrate reluctance

toward engaging in formal financing options, as evidenced by

Mittal & Raman (2021). Thus, the decision of microbusiness

owners to seek formal or informal external financing is

crucial for understanding how these businesses can acquire

the necessary resources, particularly in financial aspects.

This understanding will equip them with the essential

knowledge to survive and expand their individual businesses.

One aspect that highlights the importance of business

owners' decisions is the study by Reyes (2020), which argued

that "the lack of access to financing is the most serious

constraint to MSME growth and development." Although

government financial institutions and private banks provide

financial support and make funds easily available for MSMEs,

they still encounter hesitancy and difficulty accessing

funds due to various factors. These include the lack of

collateral to offer, limited credit histories and banking

relationships, inadequate financial records and business

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plans, and high interest rates. Therefore, to sustain their

business, MSMEs tend to rely on different funding sources,

particularly informal external financing.

However, given that access to finance is such a

hindrance for these businesses, how are they making

decisions to remain on track? The right financing decisions

enable companies not only to achieve their goals but also to

learn to adapt and thrive in the ever-changing landscape of

prevailing market conditions (Nurchayati, 2023). For micro-

businesses, accessing adequate financing can be a

significant challenge due to limited resources and the

constraints of the financial market. These constraints often

restrict the range of financing options available to micro-

business owners, forcing them to make decisions under

conditions of scarcity. Consequently, micro-businesses may

need assistance with trade-offs and compromises when

selecting the most suitable financing instruments.

In this study, the comparison of informal external

financing, as compared to formal external financing, is

defined as small, unsecured, and short-term funding capital

sources that can be acquired from (1) private money lenders,

(2) relatives, and (3) friends of the business owners, as

well as other enterprises (Nguyen & Nguyen, 2020). Its

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existence is driven by imperfections in the formal credit

markets. Due to their lack of accessibility, informal

sectors cater to borrowers, particularly micro-businesses,

who are overlooked or underserved by traditional banks. Vice

versa, formal external financing simply refers to obtaining

funds from official financial intermediaries like banks. It

includes formal debt sourced from banks, which is crucial

for startup and business growth & development.

According to Nguyen & Nguyen (2020), "even though the

importance of informal finance has been widely confirmed, we

know little about the underlying mechanisms that lead to the

decisions to use this funding source." While numerous

studies have examined the financing challenges faced by

microbusinesses in making decisions about accessing funds

externally, there is a lack of studies directly analyzing

the factors that influence micro-business owners’ decisions

to seek financing through formal versus informal external

channels. He also pointed out that prior research often

lacks thorough explanations regarding why small businesses

opt for informal financing, typically attributing it to

being 'forced' into such arrangements. This is often a

result of banks limiting access to funds for borrowers,

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which leads the informal sector to cater to those borrowers

who are unable to secure funding from traditional banks.

Although several studies examine the financing

preferences of small and medium-sized enterprises (SMEs) in

developed and developing countries, empirical evidence on

financing preferences and the determinants of financing

preference among microenterprises remains scarce (Zabri et.

al.,2021). Owing to this, the researchers aimed to explore

the various factors influencing the decision-making process

of these specific types of small businesses, taking into

account both the complex nature of their financing

strategies and the limited understanding thereof.

A study examining the financing preferences of micro-

business owners, particularly comparing formal and informal

external financing, will provide substantial information to

researchers regarding the external financing of businesses.

This study will lay a foundation for micro-businesses on how

they can further develop and improve their financing

strategies, and it will help enhance understanding of the

decisions micro-businesses make in determining whether to

choose formal or informal financing for their business

funding.
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Thus, to gain insights into the external financing

decisions made by micro-businesses, a comparative study

entitled, "A Comparative Analysis of Formal and Informal

External Financing Decisions Among Micro-Businesses in

Cabiao, Nueva Ecija" will be conducted to further explain

the prevalent problems and determinants of financing

decisions of micro-businesses.

Using various determinants such as individual factors,

organizational factors, and contextual factors, the

researchers will compare how different micro-businesses

across the vicinity of Cabiao, Nueva Ecija determine their

external financing decisions. Furthermore, drawing on the

data collected from various micro-businesses, this paper

aims to answer a specific question: How do micro-businesses

decide on their financing, and what factors influence these

decisions? This question is supported by several inquiries

from the theoretical framework formulated by Nguyen & Nguyen

(2020).

Answering these questions will provide an explanation

of the determinants and factors considered when choosing

external financing for businesses. Serving as a foundation

for understanding the point of view of micro-business

owners, this study will contribute new evidence regarding

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the nature of financing for micro-businesses, enrich the

body of knowledge on entrepreneurial financing, and provide

useful information to enable policymakers and lending

agencies in the microfinance system to develop assistance

for micro-businesses with financial services and strengthen

the framework of microfinance (Zabri, 2020). This analysis

will provide valuable knowledge for researchers as they

progress in their academic journey, preparing them for

diverse career paths by teaching them how one of the crucial

aspects of micro-business is managed by entrepreneurs.

Theoretical Framework
 General de Jesus College
San Isidro, Nueva Ecija

Figure 1. Theoretical Framework

In the field of corporate finance, there has been

considerable research into how companies decide which

funding sources to use for their investment projects.

However, the situation differs for micro-businesses, as the

existing literature concerning their financing decisions

lacks depth and comprehensive development (Nguyen and

Nguyen, 2020).

A study of Nguyen and Nguyen (2020) investigated the

financing decisions of small businesses in Vietnam. It

proposed a theoretical framework in which financing

determinants come from three dimensions: entrepreneur’s

individual factors, organizational factors, and contextual

factors. Their study showed that factors from all three

dimensions are important in understanding small businesses’

financing decisions.
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As such, the researchers drew inspiration from this

study and gave emphasis on understanding micro-businesses’

financing decisions using the three aforementioned

determinants. The previous study focused on understanding

the financing decisions of small businesses in Vietnam,

meanwhile, this study will be focusing on the financing

decisions of micro-businesses in Cabiao, Nueva Ecija.

In this study, the researchers will employ a

comparative analysis to obtain relevant information

regarding the similarities and differences among formal and

informal financing sources in the areas of entrepreneurs'

individual factors, organizational factors, and contextual

factors.

This study is conducted to gather information on the

different financing decisions of micro-businesses in Cabiao,

Nueva Ecija. The results of the comparative analysis will

serve as a basis in order to draw information regarding the

micro-businesses’ preferences among formal and informal

financing sources.

Research Paradigm
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Figure 2. Research Paradigm

This study utilized the theoretical framework

established by Nguyen and Nguyen in their research, "Formal

and Informal Financing Decisions of Small Businesses in

Vietnam."

The input frame identifies the demographic profile of

the respondents, which includes: 1.1 age, 1.2 gender, and

1.3 nature of business. It also classifies the respondents

based on the institution they utilized: 2.1 formal

institutions and 2.2 informal institutions. Additionally,

the input frame identifies three main factors that influence

financing decisions for small businesses: 3.1 individual

factors, 3.2 organizational factors, and 3.3 contextual

 General de Jesus College
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factors. 3.1 Individual factors include 3.1.1 cognitive

financial constraints, which occur when entrepreneurs have a

conservative mindset and low motivation for growth. They

also include 3.1.2 individual social capital, which refers

to an entrepreneur's ability to access external finance

through their social connections. 3.2 Organizational factors

involve 3.2.1 entrepreneurial orientation, the proactive

approach a business takes to find new opportunities for

growth and expansion. They also include 3.2.2 organizational

social capital, which is the network of social resources a

business accumulates, helping it gain recognition and

legitimacy in its industry. 3.3 Contextual factors cover

3.3.1 local governance quality, which is the extent of

government oversight and regulation in enforcing policies

and laws. Additionally, they include a 3.3.2 pro-

entrepreneurship culture, which is the societal environment

that actively supports and promotes the values and behaviors

beneficial to the success of micro-business owners.

The process frame outlines the steps to be followed in

conducting the study. It will begin with the utilization of

survey questionnaires to gather essential information. The

survey questionnaires consist of four main sections. The

first section will collect background information from

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respondents, including questions about their age, gender,

and the nature of their business. Additionally, respondents

will be asked to describe which type of institution they

utilize to obtain finances, choosing between formal

institutions and informal institutions. The second section

will include questions concerning how micro-business owners'

financing decisions differ as they consider individual

factors such as cognitive financial constraints and

individual social capital. The third section will address

questions about how organizational factors, such as

entrepreneurial orientation and organizational social

capital, influence microbusiness owners' financing

decisions. Lastly, the fourth section will consist of

questions that provide insight into the variations in

financing decisions made by micro-business owners based on

contextual factors, such as local governance and pro-

entrepreneurship culture. Subsequently, researchers will

employ statistical analysis to arrange, analyze, interpret,

and summarize the data. The interpretation of the data will

involve examining the statistical results to draw meaningful

conclusions about the financing decisions of micro-business

owners. This will include identifying trends, patterns, and

correlations that can provide insights into how individual,

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organizational, and contextual factors influence these

decisions. The summarized findings will be used to support

the study's hypotheses, contribute to the existing body of

knowledge, and potentially inform policy recommendations or

practical applications for improving access to finance for

micro-businesses.

The output frame indicates the outcome of the study

which are the comparative analysis of formal and informal

financing sources of micro-businesses in Cabiao, Nueva Ecija

and an informative brochure outlining the key findings of

the study, presenting a comparison between formal and

informal external financing decisions among micro-businesses

in Cabiao, Nueva Ecija. It would include statistics, charts,

and summaries of the research methodology and outcomes. It

would also include ways and strategies to educate the

readers.

Statement of the Problem

The study aims to conduct a comparative analysis of the

financing decisions of micro-businesses in Cabiao, Nueva

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Ecija, which utilize formal and informal finance. The

researchers aim to gain insights from these micro-businesses

regarding their financing decisions. Specifically, it

intends to answer the following questions:

1. How may the profile of the respondents be described in

terms of:

1.1 Age;

1.2 Gender;

1.3 Nature of business?

2. How may the institutions utilized by the respondents be

classified in terms of:

2.1 Formal institutions;

2.2 Informal institutions?

3. How may the differences in the financing decisions of

microbusinesses that borrowed from formal and informal

institutions be described in terms of:

3.1 Individual factors;

3.1.1 Cognitive financial constraints; and

3.1.2 Individual social capital

3.2 Organizational factors; and

3.2.1 Entrepreneurial orientation; and

3.2.2 Organizational social capital

3.3 Contextual factors?

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3.3.1 Local governance quality; and

3.3.2 Pro-entrepreneurship culture

4. Is there a significant association between the

financing decisions of micro-businesses that borrow

from formal institutions and those that borrow from

informal institutions, considering the respondent's

profile?

5. Is there a significant difference in the financing

decisions of micro-businesses borrowing from formal

institutions compared to those borrowing from informal

institutions, considering individual, organizational,

and contextual factors?

Hypothesis

Null Hypothesis:

1. There is no significant difference in the financing

decisions of micro-businesses borrowing from formal

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institutions compared to those borrowing from informal

institutions, considering the respondent's profile?

2. There is no significant difference in the financing

decisions of micro-businesses borrowing from formal

institutions compared to those borrowing from informal

institutions, considering individual, organizational,

and contextual factors?

Significance of the Study

Every research effort has significant implications for

individuals, communities, and economies. In the context of

evolving business challenges, this study examines the

similarities and differences among formal and informal

financing decisions among micro-businesses in Cabiao, Nueva

Ecija. By analyzing how these businesses decide which

funding sources to utilize, this research aims to provide

valuable insights for improving financial decision-making

processes. Thus, the findings of the study are anticipated

to become valuable sources of information for the following:

Borrowers. This study focuses on borrowers, specifically

micro-business owners, with the goal of providing insights

on formal and informal borrowing possibilities that will

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directly benefit them. Individuals can make more educated

borrowing selections by weighing the benefits and drawbacks

of each option. This knowledge enables borrowers to enhance

their financial awareness, make better decisions, and

contribute to the sustainability and growth of their

businesses.

Lenders. This study intends to investigate micro-business

owners' external funding decisions in order to assist

lenders in better tailoring services to meet the needs of

their customers. Through a comparative analysis of financing

choices, lenders can improve their range of options and

create more effective financial products. This insight

enables lenders to adapt their standards and conditions to

accommodate micro-businesses, therefore promoting local

economic development.

Policymakers. Understanding the differences between formal

and informal external finance decisions among micro-

businesses is essential for policymakers, as it guides the

design of efforts to promote their growth and

sustainability. Recognizing the problems and opportunities

in funding availability allows lawmakers to create laws that

make it simpler to access, lower barriers, and establish an

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ideal environment for micro-business development, ultimately

boosting local economic vitality.

Future researchers. This study conducts an in-depth review

of the literature, assisting future researchers in

contextualizing their work within current knowledge and

providing practical suggestions for research design and

methods. Its findings serve as a reference point for

critical evaluation and methodology refinement, providing a

core resource to inform and improve future micro-business

financing research.

Student researchers. This study provides practical insights

into financial decision-making, showing how micro-businesses

choose between formal and informal financing sources. This

real-world example helps students understand and apply

theoretical concepts, recognize the unique challenges faced

by small businesses, and appreciate the importance of

regional economic contexts. Additionally, the study enhances

analytical skills, offers methodological guidance, and

underscores the value of evidence-based policy-making,

making it a valuable resource for academic and

entrepreneurial pursuits.

Scope and Limitations of the Study

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San Isidro, Nueva Ecija

The scope of this research study is focused on

conducting a comparative analysis of formal and informal

external financing decisions among micro-businesses. Data

collection will involve two distinct groups: micro-business

borrowers from formal lending institutions, and borrowers

from informal lending sources. Both groups will be located

in Cabiao, Nueva Ecija.

This study will not cover other problems unrelated to

external financing decisions, nor will it include micro-

businesses located outside of Cabiao, Nueva Ecija.

Furthermore, the research study will not extend to factors

beyond individual, organizational, and contextual factors,

which will be solely used to compare formal and informal

external financing decisions among micro-businesses. Each

respondent will be provided with the same questionnaire to

answer, with the main source of data derived from it.

Even though limitations are acknowledged, the study

still provides reliable and valid information through the

researcher's systematic method in conducting the study.

Definition of Terms
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In order to promote clarity and comprehension within

the scope of this research, definitions for key terms are

provided herein.

Cognitive Financial Constraints. The personal limitations or

biases that individuals may have when making financial

decisions for their micro-businesses. These constraints

occur when entrepreneurs maintain a conservative mindset,

high risk aversion, and low motivation for development

(Nguyen and Nguyen, 2020).

Contextual Factors. Refer to external influences that shape

micro-business owners' financing decisions, with variations

observed under conditions representing societal attitudes

towards entrepreneurship within a community.

Entrepreneurial Orientation. Refers to the strategic mindset

and proactive approach adopted by a business towards

identifying and utilizing new opportunities for growth and

expansion.

External Financing Decisions. Encompass the choices made by

business owners regarding securing funds from sources

outside their business.

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External Sources of Funding. It refers to funding options

that come outside the company. These usually involve bank

loans, or money obtained in exchange for firm shares.

Formal External Financing. Refers to seeking financial help

from traditional financial institutions like banks, credit

unions, or government-backed lending programs.

Individual Factors. Refer to the personal attributes,

cognitive biases, and social networks specific to micro-

business owners, which influence their choices in external

financing.

Individual Social Capital. Involves the ability to access

external finance through social connections established

within informal networks. Informal social networks are the

web of relationships developed on a personal basis and

interest, which are used to obtain and exchange resources

and services (Andrews, 2020).

Informal External Financing. Involves obtaining funds from

sources outside traditional financial institutions. This may

include borrowing from friends, family members, or informal

lenders, or using trade credit arrangements with suppliers.

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Informal Lender. Refers to the person who gets loans from

family, friends or neighbors.

Local Governance Quality. Refers to the level of government

oversight and regulation within a specific geographic area,

typically involving the enforcement of policies and laws at

the municipal level.

Organizational Factors. Encompass internal dynamics like

structure, strategy, resources, and risk tolerance within

micro-businesses, shaping their capability to access

external financing.

Organizational Social Capital. Pertains to the accumulated

resources, capabilities, and structures of a business that

contribute to its establishment and legitimacy within its

industry or market.

Pro-Entrepreneurship Culture. Refers to a societal or

organizational environment that actively promotes and

supports the values and behaviors of micro-businesses owners

which are favorable to entrepreneurial success.

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CHAPTER II

REVIEW OF RELATED LITERATURE AND RELATED STUDIES

This chapter presents excerpts from literature and

studies associated with the analysis of formal and informal

financing decisions of micro-businesses. The researchers

conducted in-depth and thorough readings and research to aid

in the development of the research writing. This literature

review delves into the area of formal and informal financing

decisions among micro-businesses, aiming to provide insights

into their determinants, characteristics, and implications.

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The purpose of this literature review is to synthesize

existing research on formal and informal external financing

decisions among micro-businesses. By examining the

theoretical foundation, empirical findings, and conducting

comparative analysis between formal and informal financing,

this review seeks to offer a comprehensive understanding of

the topic.

Review of Related Literature and Studies

In the area of corporate finance literature, there has

been extensive research focused on exploring the decision-

making processes employed by corporations when selecting

financing sources for their investment projects. However, in

comparison, the literature concerning the financing

decisions of micro-businesses is less developed. (Nguyen and

Nguyen, 2020)

Micro-businesses, as defined by the Department of Trade

and Industry (DTI) in the Philippines in 2023, are a subset

of Micro, Small, and Medium Enterprises (MSMEs),

distinguished by their limited asset size and number of

employees. These enterprises typically require relatively

low capital investment and operate with a small workforce.

The most common type of micro-business in the Philippines is

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the sari-sari store, which can be found on nearly every

corner across the country. Additionally, other examples of

micro-businesses include laundry shops, computer shops,

printing shops, and canteens (Rizzlemay, 2022).

As of 2022, data from the List of Establishments (LE)

by the Philippine Statistics Authority indicates that there

were 1,109,684 active businesses in the Philippines. Among

these, 1,105,143 (99.59%) fell under the category of micro,

small, and medium enterprises (MSMEs), with only 4,541

(0.41%) categorized as large enterprises. Micro enterprises

constituted the largest share at 90.49% (1,004,195),

followed by small enterprises at 8.69% (96,464) and medium

enterprises at 0.40% (4,484). Together, these MSMEs created

5,607,748 jobs, constituting 65.10% of the nation's total

employment. Micro enterprises accounted for the largest

portion at 32.69%, followed closely by small enterprises at

25.35%, with medium enterprises trailing at 7.06%. In

contrast, large enterprises contributed 3,006,821 jobs,

representing 34.90% of the country's overall employment

(Department of Trade and Industry, 2023). This emphasizes

the considerable prevalence of micro-businesses across the

nation, indicating their significant presence and influence

within the economy.

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Despite their significant presence in the economic

landscape, MSMEs encounter challenges in accessing

affordable financing options. Financial institutions often

perceive them as risky borrowers due to their small size,

absence of collateral, and limited financial history. As

noted by Raquiza (2022), MSMEs face considerable constraints

in obtaining credit from formal lending institutions.

Commercial banks, in particular, are often avoided by them

due to high-interest rates, strict loan requirements,

extensive documentation, short repayment terms, and

challenges associated with loan restructuring. These

barriers interfere with the growth and expansion prospects

of MSMEs in the Philippines.

Therefore, given the strict criteria of formal

financial institutions, MSMEs frequently opt to secure

funding from informal lenders. Mpofu and Sibindi (2022)

discovered in their research in Africa that small and medium

enterprises (SMEs) resort to informal finance as a last

resort. This is primarily because they struggle to secure

credit from the formal finance sector, facing challenges

such as information asymmetry, absence of collateral, and

perceived high rates of default.

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However, this is not always the case as findings from

the aforementioned study also mentioned that some

entrepreneurs opt for informal finance even if they are

eligible for formal finance as a result of its flexibility,

convenience, and simple administrative procedures.

In greater detail, formal finance refers to the

provision of capital obtained from established financial

institutions such as banks and other recognized financial

intermediaries, as described by Nguyen and Nguyen (2020).

With that said, formal external financing plays a critical

role in facilitating business operations, particularly for

small and medium enterprises (SMEs), as indicated by Arif et

al. (2020).

Zabri et al. (2021) highlight that owner-managers who

possess extensive experience are more inclined to utilize

external debt financing, attributing this tendency to their

enhanced capacity for making informed financial decisions.

Moreover, existing research indicates that owner-managers

with an intermediate level of experience tend to have

considerable leverage and frequently opt for structured

financing options, while those with substantial business

experience are more prone to secure financing through banks.

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In addition, according to Nguyen and Nguyen (2020),

although formal bank lending typically offers lower interest

rates, the extended loan processing time may not align with

the required timeframe, potentially making it less

favorable. Moreover, despite the abundant resources in the

formal financial sector, certain borrowers, particularly

small businesses, encounter constraints in accessing loans

due to the stringent loan administration processes and

lending terms and conditions (Mpofu & Sibindi, 2022).

As per the definition outlined by Nguyen and Nguyen

(2020), informal finance encompasses the acquisition of

small, unsecured, and short-term capital from private

moneylenders, personal connections of business proprietors,

and other enterprises. This form of financing has been noted

to exhibit a positive correlation with the advancement and

performance of businesses across several developing nations,

including but not limited to China, India, Thailand,

Madagascar, Egypt, Nepal, and Vietnam.

Additionally, Nguyen and Nguyen (2020) point out that

prior research often lacks thorough explanations regarding

why small businesses opt for informal financing, typically

attributing it to being 'forced' into such arrangements.

This is often a result of banks limiting access to funds for

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borrowers, which leads the informal sector to cater to those

borrowers who are unable to secure funding from traditional

banks.

The informal financial sector has been crucial in the

financial system, stepping in to assist small businesses

that face difficulties in obtaining financial support from

formal channels. However, Mpofu and Sibindi (2022) suggest

that the informal financial sector is characterized by

limited resources, which are inadequate to meet the needs of

all potential borrowers. Consequently, loan rationing in

this sector can be attributed to these constraints on

financial resources.

Furthermore, some businesses turn to informal finance

as a last resort when they cannot get traditional bank loans

due to tight credit conditions and shortcomings in the

financial system's infrastructure. While informal financing

helps small businesses survive, it often lacks the resources

to support their growth, which can jeopardize their long-

term viability.

One noteworthy study delving into the factors affecting

micro-businesses’ decision-making processes is the research

conducted by Nguyen and Nguyen (2020). This study addressed

the question, 'How do micro-businesses determine their

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financing, and what factors influence these decisions?' They

proposed a theoretical framework encompassing financing

determinants from three dimensions: the entrepreneur’s

individual factors, organizational factors, and contextual

factors. Their findings emphasized the importance of

considering factors from all three dimensions for a

comprehensive understanding of small businesses’ financing

decisions. Hence, the researchers would employ their

theoretical framework, consisting of these three financing

determinants, in order to understand micro-businesses’

financing decisions.

One of the three determinants, the entrepreneurs’

individual factors, includes cognitive financial constraints

and individual social capital. To begin with, cognitive

financial constraints occur when entrepreneurs maintain a

conservative mindset, high risk aversion, and low motivation

for development (Nguyen and Nguyen, 2020). In light of this,

it was revealed in the study that there was some indication

that entrepreneurs with cognitive financial constraints are

more inclined to utilize informal financing sources rather

than formal ones when seeking external finance.

On the other hand, individual social capital is

significantly associated with the ability to access external

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finance through social connections established within

informal networks. According to Andrews (2020), informal

social networks are the web of relationships developed on a

personal basis and interest, which are used to obtain and

exchange resources and services. These informal

relationships are characterized by their voluntary nature

and lack of enforcement by state authority. Accordingly, it

was supported that individual social capital is positively

associated with the use of external finance. However, it was

also found that it is not positively associated with the use

of informal finance. From this, the researchers were able to

conclude that it does not ensure that social capital

established within informal networks would ultimately lead

to accessing funds from informal external networks.

Meanwhile, organizational factors encompass

entrepreneurial orientation and organizational social

capital. Entrepreneurial orientation refers to the strategic

mindset and proactive approach embraced by a business in

identifying and leveraging new opportunities for growth and

expansion (Nguyen and Nguyen, 2020). Likewise, Kennedy et

al. (2020) highlight that entrepreneurial orientation is

evident when entrepreneurs formulate strategies aimed at

innovation, proactivity, and risk-taking, collectively

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embodying the essence of pursuing new ventures.

Consequently, Nguyen and Nguyen (2020), in their study, was

able to find out that entrepreneurially oriented businesses

are more likely to use external finance. They also found

that when entrepreneurially oriented businesses use external

finance, they are more likely to employ formal financing

than informal financing sources.

Conversely, organizational social capital differs from

personal social capital in that it is not established within

entrepreneurs' individual networks but instead linked to the

business entity itself. It comprises the accumulated

resources, capabilities, and structures of a business that

contribute to its establishment and legitimacy within its

industry or market. It is often denoted by local industry

associations and considered a strategic decision for small

businesses aiming to legitimize their presence in local

markets (Nguyen and Nguyen, 2020). In light of what has been

mentioned, findings of the study revealed that

organizational social capital is positively associated with

the use of formal finance.

Lastly, contextual factors comprise local governance

quality and a pro-entrepreneurship culture. Local governance

quality refers to the level of government oversight and

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regulation within a specific geographic area, typically

involving the enforcement of policies and laws at the

municipal level (Nguyen and Nguyen, 2020). The investigation

of the aforementioned revealed that businesses located in

regions with better governance quality by local governments

are more likely to use external finance. Moreover, when

firms located in regions with better governance quality use

external finance, they are more likely to employ informal

financing sources than formal financing sources.

On the other hand, pro-entrepreneurship culture refers

to the societal or organizational environment that actively

promotes and supports the values and behaviors of micro-

business owners conducive to entrepreneurial success (Nguyen

and Nguyen, 2020). It was revealed that when firms located

in regions with pro-entrepreneurship informal institutions

use external finance, they are more likely to employ formal

financing sources than informal financing sources.

The growing demand for finance among micro-businesses

has led to the development of new types of financial

contracts, as well as the emergence of studies on how

various types of finance contribute to firm growth over

time. Despite the increasing utilization of informal

finance, micro-businesses often face difficulties in

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achieving necessary expansion. Consequently, they seek

additional financing options such as formal finance, which

may not be accessible through informal channels (Festus et

al., 2022).

Formal and informal finance have commonalities in

several characteristics. Both sectors provide individuals

and businesses with financial services such as savings and

credit facilities. Informal finance frequently targets small

entrepreneurs, low-income households, and rural areas,

whereas formal finance focuses on larger-scale firms and

metropolitan areas (Nguyen and Nguyen, 2020).

Formal financing would become an apparent alternative

for such companies seeking higher levels of growth. However,

this comes at a larger cost, since the leverage impact of

such enterprises increases (Festus [Link], 2022). Moreover,

formal finance operates on a rather comprehensive credit

system and is enforced by the legal system. Informal

finance, on the other hand, lacks standardized procedural

information and enforcement mechanisms, focusing instead on

reputation, contacts, and social networks (GAO Ming, 2022).

On the other hand, Kriese (2021) illustrates that

formal financial services, including corporate activities,

contribute positively to economic development, independent

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of the country's wealth level. Nevertheless, the influence

of informal financial services on business growth differs

depending on their origin, with either good or negative

consequences. Furthermore, the study finds that while formal

finance consistently helps business development at all

levels, informal financing undermines high and middle-income

organizations.

Both formal and informal financing come with a number

of benefits and drawbacks, but the borrower can benefit from

both by avoiding the negative aspects and utilizing the

advantages. Due to the variations in information and

enforcement establishments, each has particular benefits.

Formal finance is rather slow to adjust, yet it is

straightforward to extend and govern. Informal finance is

restricted to community and interpersonal networks and is

easily adjusted to shifts in the economy which is therefore

challenging to regulate. The relative effectiveness of

formal and informal finance is contingent upon the

associated social network, as well as financial and legal

systems at distinct stages of economic growth (GAO Ming,

2022).

Furthermore, a study discovered that access to formal

or bank finance is inversely related to security and credit

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system complexity. The study's findings show that informal

funding has a favorable impact on the growth of small

enterprises. The logical explanation is that informal

finance is inexpensive and easily accessible, less

sophisticated, and does not require collateral. Small

enterprises tend to use informal finance to avoid the

complexity of formal funding, which has an important and

beneficial effect on the firm's growth (Salman, 2020).

On the contrary, formal finance promotes the expansion

of huge enterprises. It was determined that major

enterprises possess the necessary capabilities to obtain

capital through formal finance. Firm size was discovered to

be favorably connected to formal funding, which enhances

revenue growth for major firms (Salman, 2020).

Developed economies are largely predictable, with

moderately good finance systems and very efficient judicial

systems. Therefore, formal finance plays a significant role

in promoting economic activity and development, and

consequently replaces informal financing. Rapidly emerging

economies frequently experience unanticipated fluctuations,

therefore informal finance can be easily adjusted to the

shifting market environment without requiring the

legislature to update regulations. Historical social

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networks and commercial contacts are also key components of

informal financing. Thus, informal money is an essential

financial conduit in quickly emerging nations, supplementing

formal finance. Formal financial systems and capital markets

are rarely formed in developing countries. Hence, both

formal and informal finance are crucial for economic

development and should be supported (GAO Ming, 2022).

The efficiency of formal and informal finance is often

compared in terms of their benefits to businesses and

economic progress. However, few institutional assessments of

formal and informal finance at various phases of economic

development have been conducted. Establishing institutional

metrics for formal and informal finance can be useful for

investigating the mechanisms that alter their relative

efficiency in different phases of economic growth (GAO Ming,

2022).

External financing is in fact one of the important

aspects to consider for the development of every business.

Most businesses, especially large enterprises prioritize it

over other factors for the need for capital for their

business expenditures, and their business to remain

sustainable. Thus, there are a lot of studies that show how

large companies decide to take external financing for their

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business. However, when it comes to small businesses,

especially start-ups and micro-businesses, studies about the

need for external financing and their decisions remain

lacking. To fund their business, they need to decide to take

the limited choice of financing they have in the scope of

their business (Zabri et al.,2021).

In essence, the studies conducted by Beizitere et al.

(2020) and Rita et al. (2021) emphasize the importance of

external funding in enhancing the survival and performance

of micro-enterprises, which highlight the obstacles faced by

micro-businesses in accessing external funding and how this

can hinder their growth and development. This shows the need

for research and exploration to aid the challenges faced by

micro-businesses, particularly in their decisions regarding

access to external financing.

Studies have shown that while there is some substantial

body of research on accessing external finance by micro-

enterprises, there are still a lot of aspects that still

haven’t been touched on, such as the trade-offs associated

with formal versus informal financing in small businesses in

which have not been extensively studied, highlighting a gap

in the literature (Nguyen & Nguyen, 2020). This indicates a

lack of understanding of the financial decisions of micro-

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businesses. Several factors such as limited access to

business financing, high infrastructure costs, and

inefficient bureaucratic services hinder the development of

micro-enterprises (Soemitra et al., 2022). Thus, a further

investigation into this field is necessary in order to

highlight and improve the factors affecting the development

of micro-businesses.

Preference for internal financing over external

financing among micro-enterprises has been noted, that with

a clear financing hierarchy, internal funding among micro-

enterprises is much favored (Zabri et al.,2021). This

indicates the need for a much more comprehensive exploration

of the reasons for this preference and its effect on micro-

business growth and sustainability. According to the data

survey by Beizitere et al., 2021, microbusinesses rarely use

outside funding, which highlights the significance of

understanding the variables impacting this choice.

Accordingly, while some research studies have been

conducted regarding the external funding of small and

medium-sized enterprises (SMEs) and their decisions,

research that specifically focuses on the financing

decisions of micro-businesses remains scarce and needs to be

explored (Erogul & Na, 2021). Even the behavior and attitude
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of micro and small business owners towards external finance

have been given emphasis as crucial factors affecting the

growth of micro-businesses, which implies the need for a

thorough investigation of micro-business owners and their

perspective in making decisions for their respective

businesses (Angeles, 2022).

Meanwhile, while exploring various key areas to analyze

the decisions of micro-business owners regarding their

external financial funding, related pieces of literature are

presented for further investigation opportunities. One

crucial aspect to consider is the influence of business

performance on credit accessibility for micro and small

enterprises (Chandrayanti, 2022). This can offer meaningful

insight into why the source of external funding poses such a

hindrance to businesses and the consequences of their

performance, allowing them to determine its influence.

Moreover, comprehending the current financing situation and

the challenges faced by micro-enterprises, particularly in

developing environments like China, can raise awareness of

opportunities and obstacles in accessing external finance

(Deng & Wang, 2019). Armed with this understanding, it can

be applied in various regions and developing countries, such

as the Philippines, to prioritize the need for government

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action and assistance in overcoming the obstacles faced by

micro-businesses, which are among the largest contributors

to the economy.

Furthermore, according to the study by Mago & Modiba

(2022), exploring the significance of informal financing

options adopted by micro and small businesses in various

regions like Africa can shed light on alternative financing

mechanisms outside the formal financial sector. This study

can provide insights into new opportunities and funding

options for micro-businesses, potentially leading to their

growth and development. As stated in their study, "the lack

of support from the formal financial system and the

government forces micro-businesses to explore other

financial support mechanisms," underscoring the importance

of investigating alternative financial channels. Therefore,

conducting a future substantial study on financial support

mechanisms could potentially make a difference in

recognizing the significance of micro-businesses' funding

options.

Delving into the different sources of working capital

financing for the sustainability of MSMEs is also an

opportunity for further investigation in this area. This

will provide practical solutions for maintaining financial

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stability for each type of business (Siswanti & Nawangsari,

2023). Additionally, according to the research study

conducted by Cheng & Wang (2020), utilizing "internet" in

investigating financing models and countermeasures for small

and micro-enterprises can address the complexities and

information opacity that obscure financing for these

businesses, particularly for micro-enterprises. This can be

further investigated to gather significant information about

the external financing needs of different businesses, which

can also help address the challenges they face.

Lastly, researching the impact of entrepreneurial

characteristics on credit accessibility, as shown in the

case study of small businesses in Indonesia, can provide

insights into how specific traits or so-called

“entrepreneurial characteristics” influence external funding

opportunities for different types of businesses

(Chandrayanti et al., 2020). It offers a nuanced

understanding of how entrepreneurial characteristics

influence credit accessibility among businesses. By further

investigating this, researchers and even business owners can

understand how their attitudes and behaviors affect their

business, especially in the context of external financing.

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To draw a close, the review of these various studies

and literature has shed light on the multifaceted landscape

of external finance utilization among businesses, drawing

attention to key determinants and their interplay in shaping

financing choices. From exploring the complexity of

entrepreneurs' individual factors to delving into

organizational dynamics and contextual influences, a

comprehensive understanding has emerged.

CHAPTER III
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RESEARCH METHODOLOGY

This chapter explains and defines the various data-

gathering procedures utilized and adapted in the study,

which compares the formal and informal external financing

decisions among micro-businesses in Cabiao, Nueva Ecija.

Specifically, this section provides reasons and

justification regarding the research design, the method of

selecting respondents, the location where the research was

conducted, the research instrument utilized, the manner of

data collection, and the data analysis techniques.

Research Method

In this research, a quantitative approach was adapted

by the researchers to gather, evaluate, and interpret data.

Quantitative research involves collecting and studying

numerical data to identify trends, predict outcomes, examine

test causal relationships, and apply findings to broader

populations, as described by Bhandari (2023).

Quantitative research is a powerful methodology focused

on systematically gathering and analyzing measurable data.

By employing rigorous statistical and mathematical tools,

this approach extracts insights from structured surveys,

controlled experiments, or similar methods. Its main goal is

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to measure and quantify variables, relationships, and

patterns within the data set. Through hypothesis testing,

prediction-making, and drawing generalizable conclusions,

quantitative research is instrumental across various fields

like psychology, sociology, economics, and education. It

typically involves sizable sample sizes to ensure reliable

outcomes (Alam, 2024).

According to Sreekumar (2024), quantitative research

methods are employed to study how certain events impact a

specific group of people, called the sample population. In

this research approach, different types of numerical

information are gathered using various techniques and then

statistically examined to group, compare, or highlight

connections among the data. Moreover, quantitative research

methods encompass surveys, organized observations, and

experiments.

The researchers utilized a quantitative approach in

this study in order to gather and analyze data that will

help in understanding the formal and informal external

financing decisions of micro-businesses in Cabiao, Nueva

Ecija. The quantitative research focuses on statistical,

mathematical or numerical analysis to group, compare, or

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highlight connections among the data collected from survey

questionnaires.

Research Locale

The research locale of this study is the municipality

of Cabiao, Nueva Ecija, a first-class municipality

consisting of 23 barangays. It has a land area of 111.83

square kilometers (equivalent to 43.18 square miles), this

region accounts for 1.97% of Nueva Ecija's total area.

According to the 2020 Census, its population stood at

85,862, constituting 3.72% of Nueva Ecija's total population

and 0.69% of the Central Luzon region's overall population.

Consequently, the population density is calculated at 768

individuals per square kilometer or 1,988 individuals per

square mile.

Cabiao is situated in the southwestern part of Nueva

Ecija, bordering Pampanga province. It shares its boundaries

with the municipalities of San Isidro and San Antonio in

Nueva Ecija, as well as with Magalang, Candaba, and Arayat

in Pampanga. To the northwest, it is adjacent to Concepcion

municipality in Tarlac province.

In addition, this municipality has 863 registered

micro-businesses, making Cabiao the suitable location for

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the survey because the researchers will be able to gather

relevant information regarding the formal and informal

external financing decisions of micro-businesses.

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Figure 3. Map of Cabiao, Nueva Ecija

Figure 3 illustrates the locality of Cabiao, Nueva Ecija

where the researchers will conduct the study. For this

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research, a sample size of 267 respondents has been randomly

selected from the entire population. Given the large number

of sample sizes, it is not feasible to depict every

individual business within the study. Therefore, the

researchers have chosen to focus on the distribution of

respondents across each barangay.

Description of the Respondents

The respondents of this study were microbusinesses

located in Cabiao, Nueva Ecija. These businesses were

selected based on the criteria that they must be registered

in the Municipality of Cabiao or meet the definition of

microbusinesses, which included employing fewer than 10

people and having annual earnings of less than ₱3,000,000.

Additionally, the respondents had to be currently borrowing

or have borrowed from external sources for their business.

A total of 863 registered microbusinesses were

identified across the vicinity of Cabiao using data obtained

from the Business Permit and Licensing Office of the Cabiao

Local Government Unit. The researchers conducted a

preliminary verbal survey and found that among this

population, only 17.38%, or approximately 150 individuals,

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were currently borrowing or had borrowed from external

sources. Therefore, based on the inclusion criteria for

population size, N was set at 150. The statistician, Ms.

Maria Yna Diane M. Ubaldo, calculated the sample size using

a margin of error of 7% and a confidence level of 95%,

resulting in a sample size of 86.

From this population, the researchers obtained a random

sample of 86 respondents, categorized based on the survey

criteria. The researchers ensured that the respondents had

borrowed or were currently borrowing from financial

institutions, whether through formal or informal lending for

their businesses. For ethical reasons, participation in the

study was voluntary, and the researchers sought the

respondents' approval and consent. The researchers assured

the respondents that all information provided would be kept

private and used solely for research purposes.

Sample and Sampling Procedure

A simple random sample involves randomly selecting

individuals from a population, where each member has an

equal chance of being chosen. It is the simplest probability

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sampling method, requiring minimal prior information about

the population. Due to its random nature, research conducted

on this sample is likely to have strong internal and

external validity, with reduced risks of biases such as

sampling and selection bias (Thomas, 2023).

To determine the sample size of our respondents, we

employed Slovin’s formula, which is useful for achieving a

specific confidence interval when surveying a population.

This method is particularly beneficial when there is limited

information about the population's behavior or the

distribution of a particular behavior. The formula is given

by n = N / (1 + N(e)^2) (Online Sample Size Calculator:

Slovin’s Formula Calculator, n.d.).

Our research focuses on micro-businesses that utilize

formal and informal financing in Cabiao, Nueva Ecija. A

preliminary survey was conducted to identify the number of

micro-businesses in Cabiao that have borrowed from either

formal or informal financing sources. Out of 863 recorded

micro-businesses, only 150 met the criteria for inclusion in

our study. Using a 7% margin of error, the calculated sample

size is 86. The researchers will personally distribute pen-

and-paper survey questionnaires and will collect them after

respondents have completed the surveys.

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Data Gathering Procedure

The researchers dedicated significant time, effort, and

cooperation to developing a comprehensive questionnaire that

was tailored to the decisions of respondents in choosing

external financing for each of their microbusinesses. The

survey questionnaire consisted of four parts, which were

divided into different subparts related to the respondents'

external financing decisions. To determine the agreement and

disagreement of the respondents with the statements, various

types of questions were used in the questionnaire.

After a letter of approval was authorized by the Dean

of the College of Accountancy, Mr. Bryan C. Barlis, CPA,

MBA, and confirmed by the research adviser, Mr. Mark Ruzzel

B. Gavino, CPA, the survey questionnaire was distributed to

the respondents. The questionnaire was conducted through a

pen-and-paper survey and was sent physically by the

researchers to the respondents.

The data collected from this survey was tallied and

computed for interpretation according to the frequency of

items checked by the respondents. The researchers also used

secondary resources, along with the primary information, in

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the form of published articles and literature to support the

survey results.

Construction of the Research Instrument

The research instrument was the tool that was used to

analyze, measure, and obtain data relevant to the study

being undertaken. This tool could be in the form of

questionnaires, surveys, interviews, and other methods to

collect all relevant information.

In this study, the close-ended questionnaire served as

the primary data collection instrument. This method was

considered the most effective way to collect all the data

required for the study to be completed. Additionally,

utilizing questionnaires enabled the researchers to

thoroughly assess and evaluate the study using the findings

obtained throughout the process. Moreover, the

questionnaires contained only questions related to the study

being undertaken and provided data that was needed and

necessary to complete the study.

In this study, the research instrument was divided into

four sections. The first section collected background

information from respondents, including questions about

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their age, gender, and the nature of their business.

Respondents were also asked to describe which type of

institution they utilized to obtain finances, choosing

between formal and informal institutions. The second section

included questions concerning how microbusiness owners'

financing decisions differed as they considered individual

factors such as cognitive financial constraints and

individual social capital. The third section dealt with

questions about how organizational factors, such as

entrepreneurial orientation and organizational social

capital, influenced microbusiness owners' financing

decisions. Lastly, the fourth section consisted of questions

that provided insight into the variations in financing

decisions made by microbusiness owners based on contextual

factors, such as local governance and pro-entrepreneurship

culture.

Furthermore, communication with the respondents was

done through in-person conversations. The researchers

conducted a pen-and-paper survey, which collected data

through printed questionnaires rather than electronic

devices. In this survey, each respondent completed a printed

questionnaire in which they read questions and selected the

best option that matched their responses. The questionnaire

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consisted of closed-ended questions that could be answered

with the Likert scale options: strongly agree, agree,

disagree, and strongly disagree. Each Likert scale item was

carefully crafted to reflect specific aspects of the

research constructs, allowing respondents to articulate

their viewpoints accurately. Through this process, the

researchers were able to conduct a comparative analysis of

formal and informal external financing decisions among

microbusinesses. Additionally, close-ended questions had the

advantage of providing respondents with standard responses

from which to choose, making it easier for them to answer

the questions.

Validation of the Research Instrument

Prior to administering the survey to the targeted

participants of this research, the researchers conducted a

pilot test on the formulated questionnaire to ensure that

the questions would yield pertinent data relevant to the

study. Before distributing the instrument to the pilot

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testing respondents, a letter of approval was presented to

the Dean of the College of Accountancy, the Assistant Dean

of the College of Accountancy, and the research professor

and adviser at General de Jesus College.

The researchers developed various questions for the

questionnaire based on their findings and readings from

related literature. The initial questionnaire was provided

to the research adviser for suggestions and feedback. After

obtaining approval from both the research professor and

adviser, the researchers distributed the instrument to

microbusinesses in San Isidro, Nueva Ecija, to validate and

test it, ensuring its reliability and effectiveness.

Following the panel's recommendation, the researchers

selected ten microbusinesses in San Isidro as pilot

respondents to deepen their understanding of the target

respondents and validate the survey items. After receiving

informed consent from the respondents, they proceeded to

distribute the instrument as a crucial step in the survey

process.

After the pilot testing, the data were tabulated by the

researchers and was analyzed by the statistician, Ms. Maria

Yna Diane M. Ubaldo. The instrument's reliability was

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assessed using Cronbach's Alpha, a commonly used measure of

internal consistency. A Cronbach's Alpha value above 0.70 is

generally considered acceptable, while values above 0.80

indicate good reliability. The analysis focused on three

sub-sections of the questionnaire: Individual Factors,

Organizational Factors, and Contextual Factors, as well as

the overall reliability of the instrument.

The Individual Factors sub-section demonstrated high

internal consistency with a Cronbach's Alpha of 0.866,

indicating that the items effectively measured the

underlying construct. This value was well above the

generally accepted threshold of 0.8, suggesting strong

reliability. In contrast, the Organizational Factors sub-

section showed a Cronbach's Alpha of 0.719, reflecting a

moderate level of internal consistency. While this value was

slightly below the desired threshold, it remained acceptable

for exploratory research. Conversely, the Contextual Factors

sub-section achieved an impressive Cronbach's Alpha of

0.892, signifying excellent internal consistency and

indicating that the items accurately captured the intended

construct.
 General de Jesus College
San Isidro, Nueva Ecija

Overall, the instrument achieved a Cronbach's Alpha of

0.895, which is excellent and suggests that the items across

all sections worked harmoniously to measure the constructs

of interest in the study. This analysis affirmed the

instrument's reliability and underscored its effectiveness

in assessing external financing decisions among

microbusinesses in Cabiao, Nueva Ecija.

Administration and Retrieval of the Instrument

Upon obtaining consent from the respondents, the

researchers distributed the questionnaires themselves. Each

questionnaire was accompanied by a letter of informed

consent, which indicated that the respondent had read and

understood the provided information and had the opportunity

to ask questions. It also stated that participation was

voluntary and that the respondent was free to withdraw at

any time, without giving any reason and without cost. This

letter was signed by both the respondents and the

researchers. The researchers answered any questions to

ensure that participants understood all the questions in the

questionnaire.
 General de Jesus College
San Isidro, Nueva Ecija

After the participants finished filling out the survey

questionnaire, their answers were collected. The researchers

then checked the answers to ensure that they had all been

properly recorded and gathered.

Statistical Treatment

Statistical analysis is the process of collecting and

analyzing data to identify patterns and trends. It is a

method of using numbers to try to eliminate any bias when

reviewing information (Bender, 2023). To compute and analyze

the data, the researchers will employ various statistical

techniques including frequency, percentage, and weighted

mean.

Percentage

F
P= x 100 %
N

Where:

P = Percentage

F = Frequency of responses
 General de Jesus College
San Isidro, Nueva Ecija

N = Total number of respondents

The researchers will utilize frequency count and

percentage to interpret and present the demographic profile

of the respondents.

Weighted Mean
❑
∑
❑
❑ fx
M=
N

Where:

M = Mean / Average

∑ = Summation

f = Frequency

x = Weight given to response

N = Total number of respondents

The researchers will use the Likert Scale formula to

measure the answers of the respondents with a greater degree

of agreeance. The researchers will use “Strongly Agree”,

“Agree”, “Disagree”, and “Strongly Disagree” to measure the

understanding level of respondents concerning formal and

informal financing among micro-businesses in Cabiao, Nueva

 General de Jesus College
San Isidro, Nueva Ecija

Ecija. The range and their verbal interpretation are

provided below.

Scale Mean Range Verbal Interpretation

4 4.00 – 3.26 Strongly Agree

3 3.25 – 2.51 Agree

2 2.50 – 1.76 Disagree

1 1.75 – 1.00 Strongly Disagree

Mann-Whitney U Test

Lastly, the Mann-Whitney U Test was employed to assess

whether there is a significant difference in the financing

decisions of micro-businesses borrowing from formal

institutions compared to those borrowing from informal

institutions. The Mann-Whitney U Test is a nonparametric

statistical test used to compare differences between two

independent groups when the dependent variable is either

ordinal or continuous but not normally distributed, in this

study ordinal data. This test evaluates whether the ranks of

 General de Jesus College
San Isidro, Nueva Ecija

the two groups differ significantly, making it suitable for

analyzing data with nonnormal distributions or small sample

sizes (Ubaldo, 2024).

Ethical Considerations

Every research study requires careful consideration of

ethical principles to ensure that the rights, well-being,

and privacy of participants are respected. This study,

titled "A Comparative Analysis of Formal and Informal

External Financing Decisions Among Micro-Businesses in

Cabiao, Nueva Ecija," is no exception. Given the sensitive

nature of financial data and the socio-economic implications

of the findings, it is imperative that the research adheres

to ethical guidelines throughout its conduct. The ethical

considerations of this study are outlined as follows:

Informed Consent. All participants, particularly the micro-

business owners, must be fully informed about the purpose of

the study, the procedures involved, and the potential use of

the data collected. Participants should voluntarily agree to

participate, understanding that they can withdraw from the

study at any time without facing any negative consequences.

 General de Jesus College
San Isidro, Nueva Ecija

Ensuring informed consent protects the autonomy and rights

of the participants (Resnik, 2020).

Confidentiality and Data Protection. Given that the study

will likely collect sensitive financial information from

micro-businesses, strict measures must be in place to

protect the confidentiality of participants. Any data

collected should be anonymized, and identifying details must

be securely stored to prevent unauthorized access. Data

privacy laws and guidelines should be followed rigorously to

safeguard personal and business information, ensuring that

no harm comes to participants as a result of their

involvement in the research (European Union Agency for

Fundamental Rights, 2021).

Avoiding Harm and Minimizing Risks. The study should be

designed to minimize any potential harm or risks to

participants. While the financial decision-making process

may be a sensitive subject, it is important to ensure that

the questions posed do not cause undue stress or anxiety.

Researchers must be mindful of the socio-economic

vulnerabilities of micro-business owners and ensure that

participation does not expose them to any financial or

reputational risks (Resnik, 2020).

 General de Jesus College
San Isidro, Nueva Ecija

Fairness and Non-Discrimination. The selection of

participants must be equitable and free from bias. The study

should represent a fair cross-section of micro-businesses in

Cabiao, Nueva Ecija, regardless of gender, age, or socio-

economic background. This ensures that the findings are

comprehensive and that all segments of the community are

equally represented, without favoritism or exclusion

(Resnik, 2020).

Transparency and Integrity in Reporting. The findings of the

study must be reported with accuracy and honesty. Any

conflicts of interest should be disclosed, and the results

should not be manipulated to support a predetermined

conclusion. Ethical reporting ensures the validity and

reliability of the study while maintaining the trust of

participants and the wider community (Shamoo & Resnik,

2021).

Proper Citation and Acknowledgment of Sources. Researchers

are ethically obliged to properly cite all sources and

references used in the study. Giving appropriate credit to

the original authors of the literature, data, and theories

employed is essential to maintaining academic integrity and

avoiding plagiarism (American Psychological Association,

 General de Jesus College
San Isidro, Nueva Ecija

2020). Proper citation not only upholds the credibility of

the research but also acknowledges the intellectual

contributions of previous scholars.

Social Responsibility. Finally, this study should aim to

benefit the local community and contribute to the broader

understanding of financing decisions among micro-businesses.

By highlighting both formal and informal financing options,

the research can empower micro-business owners, lenders, and

policymakers to make informed decisions that promote

economic growth and sustainability in the region.

Researchers must remain committed to the well-being of the

community and ensure that the knowledge generated is used

for constructive and beneficial purposes (Shamoo & Resnik,

2021).

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