We use Bulgarian firm-level data to investigate the impact of liquidity constraints on investment performance. Internal funds are an important determinant of investment in most industrialized countries. We test whether internal funds are important for firm investment during the current transition process in Bulgaria. We use a simple accelerator model of investment to test whether liquidity constraints are relevant in the case of Bulgaria. Our estimations are based on data for the period 1993-95, prior to the Bulgarian financial crisis in 1996-97. It turns out that Bulgarian firms are liquidity constrained, and that firms' size and financial structure help to distinguish between firms that are more and less liquidity constrained. In our view, liquidity constraints can be given a different interpretation in the case of transition economies as compared to Western economies. A more in depth analysis of the data reveals that liquidity constraints, and consequently the access to external funds for Bulgarian firm investment, are to be seen against the background of soft-budget constraints and the failure of the financial system to enforce an efficient allocation of funds. In our view, the lack of liquidity constraints may actually be seen as a sign of financial weakness in the case of Bulgaria.