Firm Financing and Performance: Indian SME Sector

Abstract

The purpose of this paper is to examine the effect of different sources of external finance on the performance of Indian Private Limited Small and Medium Enterprises (SMEs). Previous studies have used a ratio of different sources of capital to analyse their impact on firm performance. In this study, we have analysed this relationship on firms that employ only one type of external finance. This aspect is something we have not seen in any of the preceding research and can help us realise the individual influences of these sources on performance.We measure performance through equivalents of Profit Margin (PM), Return on Assets (RoA) and Asset Turnover (AT). Our PSM results reveal that small firms that are financed by either of the external sources experience lesser PM and better RoA and AT than firms that do not borrow. IS are found to wield a negative impact on PM, a positive impact on RoA and AT, as do non-institutional sources. But the influence of institutional sources on all measures of performance is lesser than that of non-institutional sources. In the case of medium enterprises, external finance has a negative impact on PM, but it is not as pronounced as it is in the case of small enterprises. There is no significant impact on RoA or AT. Such extensive study on developing countries is almost not present. This is also the first study that analyses firms that are financed exclusively by one external source of financing. Therefore, we believe this study can help us determine and distinguish between the individual contributions of different sources of funding.