A conceptual framework for identifying financing preferences of SMEs

Abstract

The aim of this study is to propose a conceptual framework for identifying the financing preferences of small and medium enterprises (SMEs) by analysing the factors affecting the financing decisions of SMEs. The formulation of the framework is based on a review of the literature on determinants of the capital structure of SMEs and studies related to SME financing. The design of this study is centred on the problem of inadequate finance faced by SMEs, which ultimately affects their performance. The major problems associated with inadequate finance are (1) accessibility of limited financial sources (demand gap) due to the effect of various quantitative and qualitative variables on capital structure of SMEs, (2) limited availability of finance for SMEs (supply gap), (3) lack of awareness about the approachability towards potential sources of finance (knowledge gap) and (4) reluctance of financial institutions in providing funds to SMEs (benevolence gap). By assessing various studies, we developed a conceptual framework for understanding the financing preferences of SMEs. This study contributes to the literature by addressing the existent financing gap for SMEs and makes an effort to diagnose the problem of access to finance in the light of determinants of capital structure and sources of finance accessible and available to SMEs. The proposed framework will assist not only policy-makers in improving lending-infrastructure and related technologies and but also managers in designing an optimal capital structure for their firms.