Pecking order theory’s impact on the financing of small- and medium-sized enterprises (SMEs) in the UK

The paper aims to examine pecking order theory (POT) impact on the financing of small- and medium-sized enterprises (SMEs) in the UK.

The paper adopts a qualitative method based on semi-structured interviews of 45 owners/managers to examine the POT impact on SMEs’ financing in the UK.

A total of 11% of owners rely on debt/equity primarily as their source of finance before internally generated funds. This suggests that the alternative POT approach is adopted in the financing of business activities. This manifests in three ways: first because there is a tax shield on the interest paid on debt; second, because the internal source of finance is not enough to cater for capital investment; and third, because an expert may be required in the businesses, in terms of venture capitalists, to help support growth and expansion. The study assesses that 89% of owners/managers will use POT in their financing judgements.

Owing to the number of SMEs that are concentrated within the UK, the study adopted a non-probability sampling technique to collect data from owners/managers of SMEs.

The study extends the POT in assessing the combination of capital strands in SME financing. Further, it informs SME owners/managers of the alternative forms of financing available for their business activities.

The last study conducted on POT within the context of the UK was in 2011 by Zata-Poutziouris. This study is timely in adding to the study of SME financing using the POT approach within the context of the UK and modestly contributes to the knowledge based on SME financing.