Abstract
Finance, considered the lifeblood of business, always been a vital issue amongst the academicians, researchers and the policy makers. Since the different groups of businessmen may use different criteria for their financing decisions and resultantly the different sources and modes of capital acquisition, their financing decisions may invariably be influenced by several determinants or factors present both on the demand and supply sides. A review of extant literature on firm finance reveals several factors including characteristics of firm and owners, skills of owners/managers, the nature and composition of available sources of capital, and last but not the least the preferences of owners/managers regarding financing decisions. This paper investigates the nature and determinants of the selection of sources of start-up capital and ongoing finance by micro and small enterprises (MSEs) in Pak economy. Our analysis revealed some significant as well as complex relationships between the demand side factors such as characteristics of firms and owners, financing attitudes and preferences, and the corresponding supply side factors such as financiers’ credit criteria and policies, nature and availability of finance and contemporary financing environment. Both the quantitative and qualitative analysis revealed an evidence and application of Pecking Order Theory of financing by MSE owners. A typical pecking order i.e. financing firstly through internal/additional owner equity, then family and fiend’s finance, then trade credit/short term borrowing, then long term debt/bank loan and lastly from new partner/equity was revealed. The capital acquisition preferences by MSEs were significantly related to the factors such as availability of financing from owners’ personal worth and social network, financing knowledge and experience, growth objectives, risk propensity and need for control. The analysis of supply side factors revealed that the financiers and banks really need to rationalize their financing criteria by incorporating in it the owners’ traits and firm dynamics, growth orientation and viability of their financing strategies. Our analysis suggested that by making finance available to the capital deficient entrepreneurs having high credit worthiness and growth orientation, the overall scenario of formation, growth and ultimate success of MSEs can be improved. The relevant training and professional courses both for the bankers, and nascent entrepreneurs are highly recommended.
Keyword(s)
Financing, Formation, growth, Micro, Small Enterprises, Pakistan, Demand and supply Analysis