SME Owners’ Financing Preferences

Part of the Contributions to Management Science book series (MANAGEMENT SC.)


Academic studies investigating the financing of SMEs commonly examine the subject by conducting multivariate regression analysis employing panel data sets consisting of accounting and finance data (see Appendix B for a comprehensive review of this literature). Researchers adopting this approach seek to explain financing choice in terms of firm characteristics such as firm size, age, asset structure, profitability, growth opportunities, and legal organisation. This methodology, whilst beneficial in theory testing and preliminary benchmark studies, neglects one of the most important aspects of small business and entrepreneurship: the central role of the SME owner. Given the primary decision making role of the firm owner, this method excludes a fundamental element of the financing and finance provision in SMEs. The approach adopted in this chapter is to record SME owners’ views on financing their businesses, and the reasons why they choose one type of finance over another, or why they avoid some forms of financing entirely. Whilst this approach may appear self-evident or overly simplistic, it can reveal explanations for observed capital structures and how financial markets and institutions might better respond to the needs of the small business community.


Venture Capital Capital Structure Financing Decision Firm Owner Debt Finance 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Ayadi R (2008) SME financing in Europe: measures to improve the rating culture under the new banking rules. Paper presented at the conference "Financing of SMEs in Europe", Société Universitaire Européenne de Recherches Financiéres, Palais du Luxembourg, Paris, 11–12 SeptemberGoogle Scholar
  2. Baeyens K, Manigart S (2005) Follow on financing of venture capital backed companies: the choice between debt, equity, existing and new investors. Working paper 06/362, Faculty of Economics and Business Administration, Ghent University, BelgiumGoogle Scholar
  3. Baker M, Wurgler J (2002) Market timing and capital structure. J Finance 57(1):1–32CrossRefGoogle Scholar
  4. Bancel F, Mittoo UR (2004) Cross-country determinants of capital structure choice: a survey of European firms. Financ Manag 33(4):103–132Google Scholar
  5. Berger AN, Udell GF (1998) The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle. J Bank Finance 22(6–8):613–673CrossRefGoogle Scholar
  6. Berggren B, Olofsson C, Silver L (2000) Control aversion and the search for external financing in Swedish SMEs. Small Bus Econ 15(3):233–242CrossRefGoogle Scholar
  7. Blanco-Mazagatos V, De Quevedo-Puente E, Castrillo LA (2007) The trade-off between financial resources and agency costs in the family business: an exploratory study. Fam Bus Rev 20(3):199–213CrossRefGoogle Scholar
  8. Blumberg BF, Letterie WA (2008) Business starters and credit rationing. Small Bus Econ 30(2):187–200CrossRefGoogle Scholar
  9. Bolton Committee Report (1971) Report of the committee of inquiry on small firms. Cmnd. 4811, London: HMSOGoogle Scholar
  10. Brierley P (2001) The financing of technology-based small firms: a review of the literature. Bank Engl Q Bull London 41(1):64–78Google Scholar
  11. Brierley PG, Kearns A (2001) The financing patterns of new and old economy firms in the UK. Bank of England Discussion Paper. London: Bank of EnglandGoogle Scholar
  12. Carpenter RE, Petersen BC (2002b) Is the growth of small firms constrained by internal finance. Rev Econ Stat 84(2):298–309CrossRefGoogle Scholar
  13. Cassar G, Holmes S (2003) Capital structure and financing of SMEs: Australian evidence. Account Finance 43(2):123–147CrossRefGoogle Scholar
  14. Chittenden F, Hall G, Hutchinson P (1996) Small firm growth, access to capital markets and financial structure: review of issues and an empirical investigation. Small Bus Econ 8(1):56–67CrossRefGoogle Scholar
  15. Coco G (2000) On the use of collateral. J Econ Surv 14(2):191–214CrossRefGoogle Scholar
  16. Cole RA (2008) What do we know about the capital structure of privately held firms? evidence from the surveys of small business finances. Small Business Administration, Washington, DCGoogle Scholar
  17. Colombo M, Grilli L (2007) Funding gaps? access to bank loans by high-tech start-ups. Small Bus Econ 29(1):25–46CrossRefGoogle Scholar
  18. Cooley PL, Edwards CE (1983) Financial objectives of small firms. Am J Small Bus 8(1):27–31Google Scholar
  19. Cressy R, Olofsson C (1997b) The financial conditions for Swedish SMEs: survey and research agenda. Small Bus Econ 9(2):179–194CrossRefGoogle Scholar
  20. De Bettignies JE, Brander JA (2007) Financing entrepreneurship: bank finance versus venture capital. J Bus Venturing 22(6):808–832CrossRefGoogle Scholar
  21. Department of Enterprise, Trade and Employment (1992) Equity capital survey of Irish indigenous industry. The Stationery Office, DublinGoogle Scholar
  22. Department of Enterprise, Trade and Employment (1995) Equity capital survey 1995. The Stationery Office, DublinGoogle Scholar
  23. Department of Enterprise, Trade and Employment (2002) Equity capital survey 2002. The Stationery Office, DublinGoogle Scholar
  24. Diamond DW (1989) Reputation acquisition in debt markets. J Polit Econ 97(4):828–862CrossRefGoogle Scholar
  25. Esperanca JP, Gama APM, Gulamhussen MA (2003) Corporate debt policy of small firms: an empirical (re) examination. J Small Bus Enterprise Dev 10(1):62–80CrossRefGoogle Scholar
  26. Fazzari SM, Hubbard RG, Petersen BC (2000) Investment-cash flow sensitivities are useful: a comment on Kaplan and Zingales. Q J Econ 115(2):695–705CrossRefGoogle Scholar
  27. Gallo MA, Tapies J, Cappuyns K (2004) Comparison of family and nonfamily business: financial logic and personal preferences. Family Bus Rev 17(4):303–318CrossRefGoogle Scholar
  28. Graham JR, Harvey CR (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60(2–3):187–243CrossRefGoogle Scholar
  29. Heyman D, Deloof M, Ooghe H (2008) The financial structure of private held Belgian firms. Small Bus Econ 30(3):301–313CrossRefGoogle Scholar
  30. Hogan T (2004) The financing of new technology-based firms in the Irish software product sector. Unpublished Doctoral Book, Department of Banking and Finance. Dublin, University College DublinGoogle Scholar
  31. Hogan T, Hutson E (2005) Capital structure in new technology-based firms: evidence from the Irish software sector. Global Finance J 15(3):369–387CrossRefGoogle Scholar
  32. Holmes S, Kent P (1991) An empirical analysis of the financial structure of small and large Australian manufacturing enterprises. J Small Bus Finance 1(2):141–154Google Scholar
  33. Howorth CA (2001) Small firms' demand for finance: a research note. Int Small Bus J 19(4):78–86CrossRefGoogle Scholar
  34. Ibbotson RG, Sindelar JL, Ritter J (2001) Initial public offerings. In: Chew DHJ (ed) The new corporate finance. Where theory meets practice, 3rd edn. McGraw Hill-Irwin, New YorkGoogle Scholar
  35. Kon Y, Storey DJ (2003) A theory of discouraged borrowers. Small Bus Econ 21(1):37–49CrossRefGoogle Scholar
  36. Lecornu MR, McMahon RGP, Forsaith DM, Stanger AMJ (1996) The small enterprise financial objective function. J Small Bus Manag 34(3):1–14Google Scholar
  37. Levenson AR, Willard KL (2000) Do firms get the financing they want? measuring credit rationing experienced by small businesses in the US. Small Bus Econ 14(2):83–94CrossRefGoogle Scholar
  38. Lopez-Gracia J, Sanchez-Andujar S (2007) Financial structure of the family business: evidence from a group of small Spanish firms. Fam Bus Rev 20(4):269–287CrossRefGoogle Scholar
  39. Michaelas N, Chittenden F, Poutziouris P (1998) A model of capital structure decision making in small firms. J Small Bus Enterprise Dev 5(3):246–260CrossRefGoogle Scholar
  40. Michaelas N, Chittenden F, Poutziouris P (1999) Financial policy and capital structure choice in UK SMEs: empirical evidence from company panel data. Small Bus Econ 12(2):113–130CrossRefGoogle Scholar
  41. Mishra CS, McConaughy DL (1999) Founding family control and capital structure: the risk of loss of control and the aversion to debt. Entrepren Theor Pract 23(4):53–64Google Scholar
  42. Mulcahy D (2005) Angels and IPOs: policies for sustainable equity financing of Irish small businesses. Studies in Public Policy no. 16, Trinity College Dublin: the Policy InstituteGoogle Scholar
  43. Myers SC (1977) Determinants of corporate borrowing. J Financ Econ 5(2):147–175CrossRefGoogle Scholar
  44. Myers SC (1984) The capital structure puzzle. J Finance 39(3):575–592CrossRefGoogle Scholar
  45. Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13(2):187–221CrossRefGoogle Scholar
  46. Norton E (1991) Capital structure and small growth firms. J Small Bus Finance 1(2):161–177Google Scholar
  47. O' Connor F (2005) Wallace's dolce vita, Business and Finance, 16–30 June: 42–45Google Scholar
  48. Organisation for Economic Cooperation and Development (OECD) (2006) The SME financing gap: theory and evidence, vol 1. OECD Publishing, ParisGoogle Scholar
  49. Ou C, Haynes GW (2006) Acquisition of additional equity capital by small firms: findings from the national survey of small business finances. Small Bus Econ 27(2–3):157–168CrossRefGoogle Scholar
  50. Poutziouris PZ (2001) The views of family companies on venture capital: empirical evidence from the UK small to medium-size enterprising economy. Fam Bus Rev 14(3):277–291CrossRefGoogle Scholar
  51. Poutziouris PZ (2002) The finanical affairs of smaller family companies. In: Fletcher DE (ed) Understanding the small family business. Routledge, LondonGoogle Scholar
  52. Ray GH, Hutchinson PJ (1983) The financing and financial control of small enterprise development. Gower, AldershotGoogle Scholar
  53. Reid GC (1996) Mature micro-firms and their experience of funding shortages. Small Bus Econ 8(1):27–37CrossRefGoogle Scholar
  54. Smart SB, Megginson WL, Gitman LJ (2007) Corporate finance, 2nd edn. Thomson South-Western, MasonGoogle Scholar
  55. Smith RL, Smith JK (2004) Entrepreneurial finance, 2nd edn. Wiley, New YorkGoogle Scholar
  56. Sogorb Mira F (2005) How SME uniqueness affects capital structure: evidence from a 1994–1998 Spanish data panel. Small Bus Econ 25(5):447–457CrossRefGoogle Scholar
  57. Stiglitz JE, Weiss A (1981) Credit rationing in markets with imperfect information. Am Econ Rev 71(3):393–410Google Scholar
  58. Ullah F, Taylor P (2007) Are UK technology-based small firms still finance constrained. Int Entrepren Manag J 3(2):189–203CrossRefGoogle Scholar
  59. Von Kalckrueth U, Murphy E (2004) Financial constraints and capacity adjustment in the United Kingdom: are small firms really different? evidence from a large panel of survey data. Paper presented to the Royal Economic Society Annual Conference, University of Wales Swansea, 5–7 AprilGoogle Scholar
  60. Vos E, Jia-Yuh Yeh A, Carter S, Tagg S (2007) The happy story of small business financing. J Bank Finance 31(9):2648–2672CrossRefGoogle Scholar
  61. Watson R, Wilson N (2002) Small and medium size enterprise financing: a note on some of the empirical implications of a pecking order. J Bus Finance Account 29(3–4):557–579CrossRefGoogle Scholar
  62. Weaver SC (1993) Why don't we just ask them. Financ Pract Educ 3(2):11–13Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.Fiontar Dublin City UniversityDublin 9Ireland

Personalised recommendations