Financing Preference of SMEs and its Impact on Growth

Abstract

This dissertation presents a study to examines the influence of firm characteristics, owner characteristics and control mechanisms for information asymmetry on the SMEs external financing preference and how this preference together with other firm determinants impact the growth of firms. This research was a cross-sectional study which relied solely on primary data. A binary logistic regression was used to analyze the data due to the dichotomous nature of the dependent variable- financial contract type and the objectives that needed to be achieved. The empirical results suggest that firm characteristics play an important role in influencing the external debt preference of SMEs. Both legal status and age of the firm had a positive influence on SMEs preference for debt.

In addition, the sector in which SMEs operated and the growth category had a positive influence on their preference for debt. The study suggests that SMEs follow the pecking order theory. However, this preference for debt has a negative impact on the growth of firms. Therefore, SMEs should implement internal policies on debt management and have in place proper monitoring mechanisms to mitigate the adverse implication of debt and its negative impact on growth.