Malaysian SMEs’ liability structure and its impact on profitability and growth

Abstract

This paper offers new evidence as to how the heterogeneity in small and medium enterprises’ (SMEs’) liability structure affects their growth and profitability. On average, SMEs in our sample incurred a shortage in spontaneous (supplier) financing of 24.9% of total assets. This shortage is financed by bank debt of 21.1% which consists of trade-line facilities (9.6%) and term loans (11.6%). SMEs also finance this shortage in spontaneous financing with non-bank financing sources such as leasing (3.3%) and related party loans (2.9%). Regression results show that SMEs that are efficient in working capital management (shorter cash conversion cycle) tend to perform better. This value creation in efficient working capital management mainly arises from longer payable period enjoyed from the suppliers. SMEs that obtained more loans from related parties tend to exhibit higher performance. Conversely, SMEs that extend more loans to their related parties are associated with lower performance. In terms of growth, SMEs with access to banking facilities tend to enjoy higher growth rate. However, excessive debt in balance sheet is detrimental to SMEs’ growth prospect.