A decision model for the suitable financing for small and medium enterprises

Abstract

This research proposes a "model of selection of the financing sources" which allows to identify both the financing entity to which the company may resort and the appropriate financing methods for the company (with particular reference to alternative instruments to the banking ones). Based on a sample of small and medium-sized Italian companies, and thanks to a quantitative method, the proposed model permits to select the financial sources, in order to choose the most appropriate financing methods for small and medium companies. It allows to suggest to the owners/or to the management appropriate debt-covering instruments different from the banking ones. The application of the model enables to change the financial culture within the company by expanding the knowledge and the use of alternative financing instruments to the bank and working on management unpreparedness and capital inadequacy of the companies. The originality of the research is coherent in the current context of the reference, which is changing in a profound way for both economic and normative reasons as well as presenting a different perspective in the light of the companies' experience of the past years.Reference to this paper should be made as follows: Giacosa, E. and Mazzoleni, A. (2016) 'A decision model for the suitable financing for small and medium enterprises', Int.

Why small and medium-sized firms tend to make recourse to external debt: An investigation into an Italian sample

“…The dilemma (Dallocchio et al, 2011;La Rocca, 2007) of the right financial structure has been discussed in numerous publications (Venanzi, 2003;Zazzaro, 2008), as the topic has an important role in terms of business management (Giacosa and Guelfi, 2003;Giacosa, 2015;Fazzari et al, 1988) and the financial requirements of a company (Ferri and Messori, 2000;Oliveira and Fortunato, 2006). Within this context, a proper definition of the financial structure has been made (Grandinetti and Nassimbeni, 2007), along with the balance between different sources of financing (Capasso et al, 2015;Giacosa and Mazzoleni, 2017;La Rocca, 2007), the attitude of self-financing (Brealey et al, 1999;Rossi et al, 2015), the balance between financing and investments (Golinelli, 1994;Miglietta, 2004) and the suitable level of financial independence from third parties (Giacosa and Mazzoleni, 2016). In terms of funding, a company needs to choose between equity and external borrowings (Miglietta, 2004;Rossi, 2014, b;Rossi et al, 2015), as their equilibrium influences the financial and economic situation in terms of financial costs and the freedom of action in terms of investment strategy and independence from third-party investors (Baginski and Hassel, 2004;Bernstein and Wild, 1998;Brealey et al, 1999;Singer, 2000).…”

“…Some studies claim that medium/long-term indebtedness is correlated in a negative way with the companies' age (Giacosa and Mazzoleni, 2016;. Indeed, newly created companies have difficulties obtaining financial debts as a result of informational asymmetries between potential funders and the companies' management and a greater probability of default (Mac An Bhaird and Lucey, 2010).…”

The financing methods for small and medium companies: comparison between Italy and Germany

“…The company's financial structure represents a relevant topic in the literature, as it could influence the company growth (Becchetti and Trovato, 2002;Carpenter and Petersen, 2002;European Investments Bank, 2003;Fagiolo and Luzzi, 2004;Fazzari et al, 1988;Gambini and Zazzaro, 2008): indeed, the collection of funds impacts on the investments opportunities, and the lack of money could obstacle the aforementioned growth (Honjo and Harada, 2006;Lang et al, 1996;Giacosa, 2015;Oliveira and Fortunato, 2006;Mahérault, 2000;Venanzi, 2010). Researchers are usual to quantify the growth in quantitative terms (i.e.…”

“…In these terms, the company's ability to repay the debt through the financial resources derived from its core business has been investigated: several indicators permit to evaluate this aspect, including operating revenue in terms of turnover (Ferrero et al, 2006;Giacosa, 2011 andGiacosa and Mazzoleni, 2012). A right definition of financial structure also permits to protect the power within the company (Becchetti and Trovato, 2002;Carpenter and Petersen, 2002;Fazzari et al, 1988;Herrera and Minetti, 2007;Honjo and Harada, 2006;Lang et al, 1996;Machauer and Weber, 2000;Oliveira and Fortunato, 2006), when considering different types of shareholders (Levinthal, 1988;Prendergast, 2000;Rasmusen, 1987;Ross, 2004;Shavell, 1979).…”

“…According to the second group, the choice in terms of financing, distinguishes debts (such as the accounts payable, the banking system and the other various financial entities different than bank) from equity (such as own resources granted by the shareholders) (Caselli et al, 2013;Giacosa, 2015;Giacosa et al, forthcoming).…”