The determinants of SMEs capital structure: Overcoming supply constraints

Abstract

This paper studies the most relevant literature on firms’ capital structure, in general, and Small and Medium Enterprises, in particular. Evidencing that SMEs’ financing needs to evolve with their age, literature notes that failures in this market stem generally from a shortage in capital supply and from the extreme degree of opacity which characterizes young and small corporations. The forthcoming Basel III regulations will strengthen the future banking environment but probably affect even more financing to small businesses. Given that the imperfections of this market are not only present in periods of economic turmoils but also on a structural basis, finding ways to enhance SMEs’ transparency, and designing instrument to reduce dependence from bank credit, should be a priority for future actions undertaken by practitioners and regulators. Following the effective examples of the Indian SMEs Rating Agency, of the Korean corporate bonds market and of the growing phenomenon of crowdfunding, this work analyzes their pros and cons as well as their potential to become worldwide industry standards.