Capital structure decision making for SMMEs in the South African context

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.