Unlocking Potential: Exploring Financing Choices Among Small and Medium Enterprises

Abstract

This study investigates the financing preferences of small and medium enterprises (SMEs) in Pakistan and determines their adherence to the hierarchy of financing sources as proposed by the Pecking Order Theory. The study employs a robust methodology, utilizing a sample of 202 Pakistani SMEs and collecting data through structured self-administered questionnaires. Rigorous robustness checks are conducted to ensure data reliability and consistency. The findings reveal a discernible financing hierarchy within Pakistani SMEs, confirming the principles of the Pecking Order Theory. Retained earnings emerge as the overwhelmingly preferred 1st choice for financing, followed by debt financing in 2nd place and external equity in 3rd place. This hierarchy aligns with the theory's emphasis on internal equity, the intermediate role of debt financing, and the last resort nature of external equity. The study's limitations include data availability and the potential for variable changes over time. However, its findings offer valuable insights into SME financing preferences in Pakistan and their adherence to the Pecking Order Theory. The study also provides avenues for future research into additional factors that influence SME financing preferences and their effects on financial performance and growth.