The purpose of this paper is to examine the various factors that influence a small and medium enterprise’s (SME) decision to apply for bank loans.
Data from survey responses of 145 SMEs from Selangor and the Federal Territory of Kuala Lumpur are used for this purpose. Exploratory factor analysis, logistic regression and SEM-PLS are used to analyze the data.
The findings from the survey show that an SME’s financial performance, its access to finance and its legal form play a significant positive role in its decision to apply for debt financing. Private limited SMEs that perform well and are able to access to various financing options are more likely to apply for financing. However, there is also evidence of a significant negative influence of credit history on the decision to apply for financing, as SMEs with a poor credit history are more likely to apply for financing. The age of an SME has weak influence while its size is found to be insignificant in influencing its decision to apply for financing.
The results imply the role of financial market imperfections such as adverse selection and information asymmetry in defining the SME’s demand for debt financing. The study contributes to a deeper understanding of the debt financing decisions of SMEs.
