Abstract:
The purpose of this study is to explore how managers of SMMEs make capital
structure decisions for their firms in the South African context.
The study is a qualitative and is grounded in interpretivism. The literature unpacked
pecking order and trade off theories and together with taxation and profitability they
were explored in research questions posed to SMME managers during semi-structured
interviews.
The findings in this study is that SMME managers find the notion of taking up debt for
the sake of the tax incentive to be counter intuitive, debt repayments become an
expense that erode the firm's profitability and also exposes the firm to potential
bankruptcy. The notion of borrowing without a business purpose, presents a challenge
to managers. Business objectives thus present the most compelling determinant of
capital structure decision making in this study. Pecking order theory is supported by the
findings in this study. This study finds that the Trade off theory has no standing on
capital structure decision making in SMMEs and managers explore alternative funding
methods such as loan accounts.
The implications of this study include a call for academia to undertake descriptive
studies to pursue these findings. Development of succinct business objectives will
assist SMMEs bridge the gap between themselves and funding institutions.
