An analysis of factors influencing the capital structure of small, medium and micro enterprises : a growth and survival perspective

Abstract

In South Africa, there is a need for small, medium and micro enterprises (SMMEs) to become established and be sustainable. These organisations play a crucial role in the economy of South Africa, as well as across the globe. Empirical studies have acknowledged the contribution of SMMEs to the economy, as well as to the gross domestic product. However, the failure rate of these firms has also been emphasised in the same studies. The lack of finance has been identified as one of the contributing factors towards the discontinuance of small firms, hence, managing capital is an importance task for organisations. Managers need to understand the capital structure of the firm in order to make the best decisions regarding the finances of the firm. The growth of SMMEs is also crucial to all economies around the world.

Despite many empirical studies on capital structure decisions in large firms, minimal studies have investigated the capital structure decisions in SMMEs. Therefore, this study is expected to shed more light on the capital structure of SMMEs and enlighten owners/managers on the importance thereof. The aim of this study was to identify the factors influencing the capital structure in terms of the survival and growth of SMMEs in KwaZulu-Natal. The study addressed the following primary questions: what factors influence the capital structure of small, medium and micro enterprises in Durban, KwaZulu-Natal? Furthermore, what is the influence of the capital structure on the survival and growth of small, medium and micro enterprises in Durban, KwaZulu-Natal?

The study used a quantitative research design and was cross-sectional in nature. A survey questionnaire was the primary data collection tool utilised. The target population was 204 SMMEs from the retail and wholesale sectors. A convenience sampling method was adopted which resulted in a sample size of 136, with 103 responses received. The Partial Least Squares Structural Equation Modelling 5.0 software was utilised to determine the statistical results. The findings revealed that both managerial and firm-level factors influence the capital structure of SMMEs.

Managerial factors included individual goals and financing preferences of the owner/manager, network ties, attitude to debt, asymmetric information and maintaining control; whilst the firm-level factors were size of the firm, profitability and firm age.

The findings also revealed that personal savings was the most important financing choice at the initial phase of the firm, however once the firm was established, retained earnings was utilised more than any other source of finance. Retained earnings was also revealed to have a significant influence on the growth and survival of small, medium and micro enterprises