Financial Constraints and Leverage Decisions in Small and Medium-Sized Firms

Harshana Kasseeah

doi:10.22610/jebs.v4i1.302

Abstract

This paper studies the leverage decisions of small and medium-sized manufacturing firms in the UK. The relationship between debt and cash flow is studied in the light of both internal and overall financial constraints. Internal financial constraints are defined as those constraints internal to the firm that influence its financing decisions. These measures include the cash flow and profitability of the firm. Overall financial constraints account for both internal financial constraints and external financial constraints, which in turn are accounted for by conventionally used measures of financial constraints such as the size of the firm measured by the real assets and the riskiness of the firm. Results obtained indicate that firms follow a financial hierarchy when deciding what sources of finance to use. Internal financial constraints measured by the availability of internal funds are important factors that affect the relationship between debt and cash flow.

Highlights

This paper studies the relationship between debt and cash flow, the two main sources of finance for most firms by taking into account the internal and overall financial constraints that firms face
We examine the relationship between firm leverage and cash flow at SMEs in the UK since these are the two most important sources of finance of most firms
Cash flow is a vital source of financing of SMEs and they seem to follow a financial hierarchy when deciding what sources of finance to use

Summary

Introduction

This paper studies the relationship between debt and cash flow, the two main sources of finance for most firms by taking into account the internal and overall financial constraints that firms face. Internal constraints refer to those constraints that determine whether a firm would go for external financing In this case, the level of internally generated funds (mainly cash flow) would determine the amount of debt that a firm has in its capital structure. The other factor that would determine the amount of debt in the capital structure of firms is the overall financial constraints that firms might face, which refer to how easy or how difficult it is for firms to have access to external financing. Internal financial constraints are important factors that influence the amount of debt that a firm has in its capital structure.

Methods

Results

Conclusion