The Debt Structure of SMEs: An Optimization Model

Authors

Andrea Moro, University of Leicester, UK
Mike R. Lucas, The Open University Business School, UK
Uwe G. Grimm, The Open University, UK

Abstract

The existing finance literature is inadequate with respect to its coverage of the debt structure of small and medi-um sized enterprises (SMEs). In addition, the role of trust in accessing finance for such enterprises is under-investigated. This paper presents a mathematical model for optimizing the debt structure of SMEs that, since SMEs are often equity constrained, focuses on optimizing debt structure by minimizing its cost. The model is then extended by incorporating the level of trust that suppliers and bank managers have in the enterprise. The extended model, suggests that the higher the level of trust that bank managers and suppliers have in the SME, the more short-term finance an SME can obtain and should use.

JEL Codes

G21, G32, M13

Keywords

SMEs, Capital Structure, Trade Credit, Bank Debt, Trust

Recommended Citation

Moro, Andrea; Lucas, Mike R.; and Grimm, Uwe G. (2012) "The Debt Structure of SMEs: An Optimization Model," The Journal of Entrepreneurial Finance: Vol. 16: Iss. 1, pp. 87-108.
DOI: https://doi.org/10.57229/2373-1761.1008
Available at: https://digitalcommons.pepperdine.edu/jef/vol16/iss1/5