The financing preferences of small firm owners

Introduction Most small firms will never be able to raise all the funding they would like from banks and other institutions. In this crude sense there will always be a deficiency in the funding of the sector equal to the difference between the total demand for funding and that part of this demand which qualifies for funding support. This paper focuses more narrowly on the debt versus equity preferences revealed in the initial and ongoing financing of small firms drawn from a cross-section of the New Zealand economy[1]. While pointing to a gap in the supply of funds, particularly institutional equity capital, previous local research (Coopers and Lybrand, 1993) attributed most failings in the capital market to small firm owners rather than the suppliers of funds. Owners were portrayed as unable to understand the appropriate form of capital (debt versus equity) and to have unrealistic expectations of deals involving the introduction of new equity. It is the consequent restriction of choice that leads small firms to become burdened with excessive levels of debt. We begin the paper by outlining our research objective and the methodology used to pursue this. The sample of small firms used in the study is then profiled. This sets the scene for a discussion of the initial and ongoing financing preferences revealed by small firm owners. The paper concludes that supposed gaps in the supply of finance to small firms might be in part the consequence rather than the cause of financing decisions of the business owners.