This seminar focuses on the interrelationships among funding sources, firm profitability and firm productivity within the scope of Indian private limited small firms. This study exploits the data from the Fourth All-India Census of Micro, Small and Medium Enterprises: Registered Sector. While existing studies focus on the relationship between profitability and funding sources and productivity and funding sources, this study explores the possibility of profitability and productivity mediating the relationship between profitability and funding sources and productivity and funding sources, respectively. Productivity is estimated using Data Envelopment Analysis. Structural Equations Modeling is employed to account for the bidirectional relationships studied.

The results indicate that profitability has a positive impact on funding sources while productivity has a negative impact on funding sources. Productivity has a positive impact on external funding through profitability. This indicates that it is more important to be profitable than productive in order to access external finance. On the other hand, all forms of external funding are found to have a negative impact on profitability and a positive impact on productivity. External finance has a positive impact on profitability through productivity. Thus, productivity is established to be a mediating variable in the impact of external finance on profitability.

Additionally, firms that maintained books of accounts (information) and rural firms (lending relationship) were more likely to access formal finance. This finding corroborates with the prevalence of information-based lending and relationship lending. The study also indicates that firms that lack information and/or lending relationship can still access formal finance through co-funding.