May 22, 2008
Small Businesses Prefer Debt To Equity
A new study by the Small Business Administration's Office of Advocacy says small businesses prefer to take on debt rather than let others buy into their operation.
The research finds that the capital structure decisions of small, privately held firms tend to conform to a "pecking order" theory, with companies opting first for internally generated funds, then debt, with equity a last resort.
The study says that larger firms consistently use less leverage than smaller ones, older firms use less than younger ones and profitable firms use less than unprofitable ones.
The study was based on data from four independent, cross-sectional surveys of small, privately held U.S. firms conducted for the U.S. Federal Reserve Board and the U.S. Small Business Administration between 1987 and 2003.
The research finds that the capital structure decisions of small, privately held firms tend to conform to a "pecking order" theory, with companies opting first for internally generated funds, then debt, with equity a last resort.
The study says that larger firms consistently use less leverage than smaller ones, older firms use less than younger ones and profitable firms use less than unprofitable ones.
The study was based on data from four independent, cross-sectional surveys of small, privately held U.S. firms conducted for the U.S. Federal Reserve Board and the U.S. Small Business Administration between 1987 and 2003.
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