We examine whether competitors from the informal sector affect the credit constraints of registered SMEs in 86 countries. We also investigate how the quality of institutional environment alters such effect. Our findings show that formal SMEs facing competition from informal firms are more likely to be credit­constrained than their counterparts and that such adverse impact manifests only in countries with weak rule of law and control of corruption. Moreover, registered micro and small firms are more negatively affected by
the presence of informal firms competing against them than medium­sized firms because the benefits related to formality increase with firm size.