Indian SMES' Financing Decisions and Its Determinants

Nowadays, the cabbalistic role of Small and Medium Businesses (SME) both in the Manufacturing and Service sectors, specifically in developing countries like India, Pakistan, Bangladesh, and Srilanka, as this sector contributes substantially regarding GDP, employment generation, export revenue earnings and creation of a robust consumer market. However, this sector often faces issues like information asymmetry, adequate knowledge about the market, etc. This study made an attempt to observe empirically the effect of capital structure determinants on SME firms' financing decisions in the Indian context taking a sample of 134 companies (listed in BSE, separately for the manufacturing and service sector firms) from selected sectors based on GDP contribution, for the period 2011 to 2020. The study results show that manufacturing firms rely primarily on internal funds and Short-term debt. In contrast, service firms initially rely on internal funds but ultimately are bound to use long-term debt owing to investments in capital assets. Nevertheless, no capital structure theories or both theories are consistent with any of these two sectors.