Financing Behavior of Small and Medium Sized Enterprises of Khyber Pakhtunkhwa at Life Cycle Stages

Abstract

The present study explores the financing patterns of small and medium enterprises (SMEs) across different age categories in Khyber Pakhtunkhwa. The study aims to indicate whether these enterprises are congruent with or contradict to the predictions of existing theories that explains the financing decisions in SMEs. The survey covered 341 SMEs operating across the seven districts of Khyber Pakhtunkhwa (KP): Peshawar, Mardan, Karak, Chitral, Manshera, Bannu and D.I. Khan. The sample is represented by three main industries: agriculture, industrial and service. Chi-square test is used to examine the objective of the study, followed by a post-hoc analysis using standardized residuals to distinguish the inter-dependence among the variables more effectively. The findings show that the owner-managers’ personal savings are preferred by enterprises that are relatively younger (age 0-10 years). SMEs in operation for 11 to 20 years seem to take up more debt than entrepreneurs’ capital. The industry breakdown confirms the robustness of our results. SMEs in the service sector prefer internal funds and government backed loans at the start-up stage. However, enterprises across all the three business sectors, agriculture, industrial and service, with 11-20 years of existence prefer asset-based lending and debt financing. The findings from the survey study confirm that SMEs across different districts and business sectors of KP follow the assumptions predicted by the trade-off theory. Several policy implications have been recommended not only for regulatory bodies and lending institutions but also for the SME sector based on the results from empirical investigation and survey findings.