The Latin American financial sector is fragmented in a formal and an informal segment. International capital flows may affect the segmentation through its influence on credit supply and interest rates. I examine the effect of the buoyant capital inflows in the region between 2006 and 2010 on the relative usage of informal financing sources by firms of 18 Latin American countries. I focus on the role legal-institutional barriers play on amplifying or dampening the effect. I find that capital inflows are related to a lower usage of informal sources of finance. Lower banking concentration – a supply side institutional barrier – as well as lower costs to start firms and a more equal protection of property rights – demand side institutional barriers – amplify the effect.