The economy of developed and developing countries depends on small and medium enterprises and these SMEs are improving their business ideas by inculcating e-commerce [1]. Despite the prospective nature of Nigeria SMEs with features of development of economic growth, technology, and creating more job opportunities. Studies have shown that they cannot adopt e-commerce in their businesses because of lack of technology knowhow of manager as well as inadequate infrastructure, ignorance, corruption poverty and security [2].The contributions of SMEs to the development of Nigeria economy are so enormous. This made the central bank of Nigeria (CBN) launched a developmental fund on SMEs with a share capital of N220 billion in a year 2013. According to CBN, the activities to be financed include agriculture value chain, service cottage industries, artisans, trade and commerce and any income generating business as may be prescribed by the CBN from time to time. Small and Medium Enterprises (SMEs) are critical to the development of any economy as they possess great potentials for employment generation, improvement of local technology, output diversification, development of indigenous entrepreneurship and forward integration with large – scale industries [3]. Small and medium enterprises can be seen as an indiscernible part of the economy and contemporary global economic world. The pay basic role in the advancement of the economy [4]. The Nigerian government is turning to small and medium scale industries and entrepreneurs as a means of developing the economy and solving problems [5]. Small and medium enterprise stimulates economic growth as the generate employment and add to the gross domestic product (GDP) [6]. More importantly, SMEs utilize more labor – intensive equipments thereby helping to minimize unemployment especially in developing countries which therefore have a significant effect on employment creation [7]. Emphasizing on the significance of SMEs on economic growth, SMEs generate prospects for revenue generation and circulation, and wealth accumulation [8]. Although, the number of SMEs in the country had been on the increase from the year to year and despite their contributions to the economy, SMEs face many obstacles such as access to finance, access to markets, technology demands and innovation. Amongst all the factors that were mentioned above, the key factor which affect the development of SMEs is the capital requirement. Capital is the fund that is needed to start the business, support production and improve operations. For SMEs play if role in development of the economy there is need to source for efficient and adequate source of capital and capital structure combination.Capital structure combination decision is mix of debt and equity that a company uses to finance its business [9]. Capital structure decision are among the most important and crucial decision for any business because of their effect on the performance of firms. Capital structure is the various means in which a firm finances its operations which can either be through debt or equity capital or combination of both.

Theoretical Framework

Theoretical Framework: The relevant theoretical literatures will centre on the relationship between capital structure and survival of small and medium enterprises. In relation to the impact of capital structure on the survival of small and medium enterprises in a competitive environment, the following capital structure theories need brief elaboration.

Modigliani and Miller Theory

This was developed by Modigliani and Miller in 1958 in a paper presentation with the American Economic Review. The theory generally considered the beginning point of modern business. Their irrelevance theorem argued that the firm’s capital structure does not have any impact on its value. They believed that the firm value is determined based on the active side of the balance sheet. Value is generated by the earning power and risk of the underlying asset.

Pecking Order Theory                                                                                             

Myers and Majluf have developed the pecking order theory in 1984. The theory is applicable by financial managers in comparison to the trade-off theory. The pecking order theory is the order, which shows the preferences of financial managers in raising new capital. According to this theory, manager’s first choice is to use internal financing or retained earnings. Internal financing indicates that there is no need to issue debt or equity and the firm can inject its own money to finance a project. However, if the firm does not possess enough internal funds, the second option will be external financing. The external financing is divided into issuing debt and equity, and there is a preference with the issuance of debt or equity or both. The first choice in external finance is issuing debt is a safer security and less risky than equity. The pecking order allows issuing equity when the capacity of debt is fully used [10].

Trade – off Theory

The trade-off theory explains why firms are financed partly by debt and partly by equity. The optimal capital structure of a firm is often explained as a trade-off between the cost and the merits of debt. The optimal capital structure occurs when the merit and cost of debt is equal. The optimal point differs from one firm to another due to the characteristics of each firm. As mentioned above, the optimized capital structure exists when the marginal cost of debt is equal to the marginal benefit of debt [11].

Agency Cost

Agency theory is concerned with the diverging interest when the firm ownership and management are separated. The theory argues the relationship between the agent (e.g. the manager), and the principal (e.g. the shareholders). The major assumption of this theory is that the separated of ownership and management create conflicts among principals and agents. There is less conflict between principals and agents in small and medium size enterprises. The reason is that in the SMEs owner and the manager is one person. According to [12]. They argued that the existing incentive structured in the small and medium size firms create fewer agency conflicts between different claimants. However, SMEs may experience agency cost, when the principals and agents are separated. The agency cost problem is also tense in SMEs because they do not have to disclose their financial information and financial statement [13]. Argued that the problem of agency cost will increase, when a firm has a high level of asymmetric information. Therefore it is expected that small business experience a greater agency cost since the manager of the business gives the first priority to his own interest. On the other side, solutions for agency cost problem in SMEs are more expensive than in large listed companies. Monitoring process in SMEs IA harder than listed firm. Moreover, rules and regulations force large companies to be transparent about their financial activities while SMEs since they are not obliged to fully disclose information to the market as usually occurs with large firms, which allow a reduction of agency costs. SMEs may raise more debt in order to con troll the self – interests of the agent, and to limit the negative consequences of altruism the firm. The phenomenon of altruism shows how the agency problem becomes more apparent in SMEs if they do not allocate the reason properly. Therefore, the level of agency conflict becomes a decisive factor that affects the affects the capital structure of the SMEs [14]. Points out that the most relevant capital structure theory that explain the effect of capital structure on small and medium enterprises (SMEs) is the one that is related to agency cost theory. To this end, this theory (Agency cost) would be adapted in examining the objectives of the study.

Several works of previous researchers were reviewed in the course of this study. Few of their submissions investigated are discussed in this section. are of the view the failure of government in terms of poor cordinations, monitoring and policies inconsistence are tha main barrier faced by the SMEs in accessing finanacial assistance [15]. In his own work, focused on project finance for small and medium scale enterprises, he sees consistent policies changing as an obstacle for SMEs in accessing financial assistance from formal source like bank [16]. findings on the effect of planning on the performance of small and medium enterprises in south – western Nigeria show that the inability to gain access to source of finance among other prblems is a major challenge facing SMEs, in his title, strategic effect of the source of fund in the performance of SMEs, it was revealed that easy access to source of fund goes a long way to affect the performance of SMEs [17-18]. The findings revealed that there is a positive and strategic relationship between performance of an enterprise and availability of funds. focused on impact of level of education and experience on profitability of small and medium enterprises, a study Grocery shops in South Africa [19]. The finding shows there is significant relationship between the level of education of business owners and experience in accessing funds from the various source of financing SMEs.

Conceptual Framework

Role of SMEs in Economic Development

SMEs have a number of significant contributions to the economic growth and development of Nigeria. SMEs enhance promotion of economic growth and enable equitable distribution of wealth in an emerging economy [20]. SMEs also participate actively in the mobilization of the natural resources and reduce unemployment [21]. Summarily, the enormous roles of SMEs in an economy are as discussed below: SMEs are sources of employment generation, this is because more jobs per unit of investment capital and per unit of energy consumed are created worldwide by SMEs than large-scale enterprises, providing employment to a lot of unemployed Nigerians. SMEs provide a training avenue for the creation of local entrepreneurs in several areas of Economic activities. They are regarded as training ground for developing human capital and potential entrepreneurs who are well equipped to establish and successfully manage business organizations regardless of size. SMEs proliferation has increase the level of economic and social development particularly in the rural areas [22]. They are easily located in rural areas because they can survive on rudimentary industrial infrastructures. Consequently, they serve as major facilitators for industrial dispersal and rural development and thus help in mitigating the rural-urban drift. When SMEs are cited in rural areas, they help to improve rural infrastructure and the living standard of the people. Social amenities such as: road, electricity, pipe - borne water, telecommunication facilities, etc, SMEs act as catalysts to large enterprises through the supply of raw materials and goods to them. They also engage in the distribution of finished products from such big firms to the final consumers [23]. Sound development of SMEs has positive implications for improved standard of living of the people. In addition, it generates foreign exchange for further development of the economy.

Determinants of the capital structure of small and medium enterprises

Capital structures of SMEs are characterized with independent variables use for analyzing the study. Such explanatory variables are size of the firm, assets structure, growth, profitability, industry affiliation, age and operating risk.

Firm Size

Firm size is usually used as a potential determinant of capital structure decisions. Many reasons could be listed that justify the inclusion of size indicators, such as differential access to outside financing and credit markets, investment opportunities and riskiness related to scale. In particular, the transaction costs associated with outside financing are likely to depend on size of the firm, most especially SMEs [24].

Asset structure

Asset structure is a major concern for financing decisions. Firms, including SMEs, may use tangible assets as collateral, either providing more access to credit or reducing its cost, to the extent that such assets function as a guarantee in case of default [25]. Similarly, it has been argued that collateral reduces adverse selection and moral hazard costs [26].

Growth

The firms that experience high growth rates often need more aggressive financing. From a pecking order perspective, once these firms exhaust their internally generated funds, they will resort to debt financing. Therefore, for two firms with the same profitability, we should expect that the firm with a higher growth rate will be more leveraged. However, agency (cost) theory arguments suggest that debt may have an important disciplining effect on managers, reducing managerial discretion and thus preventing them from wasting valued corporate resources. In this context, high profitability but low - growth firms would benefit more from debt financing. This shows that SMEs are not likely to benefit from high growth rate [27].

Profitability

The relationship between firm performance measured by its profitability ratio and capital structure may be justified by the pecking order theory. Focusing on SMEs, this theory is especially appropriate for a number of reasons [28]. First, these firms are often opaque and have important adverse selection problems that are explained by credit rationing and therefore bear high information costs considerably higher than large enterprises, where information asymmetry is lower. This argument should be especially relevant for privately owned SMEs because they are submitted to much less stringent governance requirements, including lower auditing and accounting procedures, when compared to their larger or publicly traded counterparts. In other words, besides charging higher interest rates, credit suppliers are more likely to simply restrict these firms’ access to the 

credit market especially in less financially developed countries [29]. Furthermore, SMEs are usually managed by owners whose main objective is to minimize the intrusion in their business and avoid the discipline inherent in financing options other than internal funds. That is why internal funds will lie in first place of their preference of financing. If internal funds are not sufficient, SMEs will prefer debt to new equity mainly because debt means lower levels of intrusion and, most importantly, lower risk of losing control and decision-making power than new equity. There is strong evidence that their financing decisions follow a hierarchy, with a preference for internal over external financing and for debt over equity. Consistently, most of the few studies with SMEs show a negative relationship between leverage and profitability. However, it has also been argued that firms with better past performance have lower default risk and thus higher debt capacity.

Industry affiliation

The body of research surveyed by Frank and Goyal (2009) suggests that industry affiliation is an important predictor of firm leverage, at least for publicly traded firms. Industry affiliation may capture several otherwise omitted factors, such as industry specific regulatory restrictions and the influence of the type of business activity on the requirements for and access to external funding. However, this is not applicable to SMEs. Ri6, Omobolanle Adams Street, Off Fidiso, Abijobsk Intuitively, riskiness should be negatively related to leverage, considering the punishment for prospective defaults and bankruptcy, which is represented by substantially higher interest rates and expected bankruptcy costs when the firm approaches dangerous leverage levels. Several studies using listed companies report results that are compatible with this logic.

Age

Age of the business is fundamental in the study of capital structure of the companies [30]. For this reasons, the financial provider such as SMEs evaluate the creditworthiness and reputation of the SMEs over sometime. The variety of financing needs is related to the business life cycle requirement which again is related to the age of the business. Sources of financing depend on whether a business is developing or maturing. Start-up companies normally source their financing need through personal saving, friends and relatives Faridah & Madeline, 2004.

The study used primary data which were collected by means of questionnaires. The data were analyzed using regression analysis tool under E – view 9.0 The questionnaires administered were structured on 5 point Likert scale ranging from strongly agree to strongly disagree. 47 SMEs were selected at random with the aid of stratified random sampling and 5 respondent s from each of the SMEs chosen, thereby making a total number of 235 respondents, and out of this, 120 respondents returned their completed questionnaires. The choice of the SMEs was borne out of the contributions of these small and medium enterprises to the labour market.

Model Specification

A multiple regression model was applied to determine the relative importance of each of the variables with respect to impact of capital structure on the survival of small and medium enterprises in a competitive environment.

Y = f(x₁, x₂, x₃, x₄, x₅, x₆, x₇)

Y_i = b₀ + b₁x_1i+ b₂x_2i+ b₃x_3i + b₄x_4i+ b₅x_5i + b₆x_6i + b₇x_7i (i = 1, 2, 3, 4, n)

Y_i = b₀ + b₁x_1i+ b₂x_2i+ b₃x_3i + b₄x_4i+ b₅x_5i + b₆x_6i + b₇x_7i + ?_i ____ equation 1

Y_i = b₀ + b₁(Capital structure decision)i + b₂(Capital structure impact)i + b₃(Size)i + b₄(Growth)i +b₅(Age)i +b₆(Asset structure)i + b₇(Profitability)i + ?_i

Where;

Y= Debt financing of Small and medium enterprises

b₀ = Constant

b₁, b₂, b₃, b₄, b₅, b₆ and b₇ = Regression coefficients of predictors in the model

X₁ = Capital structure decision on survival of SMEs in a competitive environment; X₂ = Capital structure impact of SMEs on economic growth; X₃ = Firm size; X₄ = Growth; X₅ Age; X₆ = Asset structure; X₇ = Profitability

?_i = Error term

Hypothesis Formulated

Ho₁: Capital structure enhances SMEs sustainability and survival of small and medium enterprises in a turbulent environment. Ho₂: There is no effective impact of capital structure of SMEs on the growth and development of developing economy.

Source: Authors compilation (2018)

The table above shows that 62.5% of the respondents are BSC/HND holders. This shows that the respondents are well informed concerning the topic. 56.7% and 37.5% of the respondents are management and senior staff respectively. This means that the respondents are very familiar with the companies; therefore, there is high possibility of relying on the information given. 51.7% and 45.8% of the respondents work in Finance and Account department respectively. This implies that the respondents know the nitty-gritty of the concept of the topic; hence, the information supplied could be relied upon. Majority of the respondents have spent 6 - 10 years with the companies, this shows appropriate cognate experience.

Table 1: Marketing Others.

Source: Author’s compilation (2018)

The table above shows that 53.3% of the respondents strongly agreed while 38.3% agreed that there is a link between small and medium enterprises and capital structure decisions. This implies that there is relationship between capital structure decision and small and medium enterprises.

Table 2: Discussion on Links between SMEs and Capital Structure Decision.

Source: Author’s compilation (2018)

From the above table, 48.3% (strongly agree) and 39.2% (agree) are significant to investigate capital structure impact of SMEs on economic growth. This indicates that there is capital structure impact of small and medium enterprises on economic growth.

From the above table, 48.3% (strongly agree) and 39.2% (agree) are significant to investigate capital structure impact of SMEs on economic growth. This indicates that there is capital structure impact of small and medium enterprises on economic growth.

Normality Test

Normality of variables is tested by assessing the skewness and kurtosis values. When data is normally distributed, the values of skewness and kurtosis are zero. Values outside the range of +2 or -2 are not normally distributed Gosslin, 2005. In this study, the skewness and kurtosis values are within +2 and -2. See table 4 below: 

Table 3: Capital Structure impact of SMEs on Economic Growth.

Source: Author’s compilation (2018)

Graphical confirmation of Normality Test (QUARTILE- QUARTILE PLOT)

From the graph above, it shows that the plots fairly rest on the straight line. This indicates that the sample follow a normal distribution.

Results on Regression Analysis:

Dependent Variable: Y

Method: Least Squares

Date: 04/16/18 Time: 21:46

Sample: 1 120

Included observations: 120

Table 4: Test of Normality.

Source: Author’s compilation (2018) Interpretation

From the model, it is expected that b1, b2, b3, b4, b5, b6 and b7 are greater than zero (0). The model for this study is valid as X1 and X2 have positive relationship with Y. The co-efficient of the variable x1 shows 0.189308. This means that a change in capital structure decision of SMEs will have 18% effect on external financing of SMEs. Co-efficient of variables x2 interprets that increases in capital structure impact of SMEs will results into 27% increase in economy growth. The probability value of the explanatory variables is 0.00040 and 0.00023 for x1 and x2 respectively. This shows that they are significant at 5% level of significance. Durbin Watson factor between the value of 1 and 3 implies absence of autocorrelation [31-33]. From the regression analysis result shown in the table 5 above, the Durbin Watson stat is 2.11 1641 which means there is absence of serial correlation.

Table 5: Regression Analysis Results.

Summary of Findings

Table 6: Hypothesis

Small and medium enterprises (SMEs) had now become indispensable in the quest for achieving economy growth in a developing country. All other things being equal, the major challenge confronting the development of SMEs in a developing country is source of finance. It was discovered that the level of debt financing is essential in dictating the pace at which a SME will operate in a challenging economy. However, the investigation had showed the existence of capital structure impact on small and medium enterprises. The factors that determine the capital structure of SMEs as revealed by the study are size of the firm, assets structure, growth, profitability, industry affiliation, age and operating risk. From the study, it was concluded that capital structure enhances the survival of SMEs in a competitive environment. More so, the capital structure impact of SMEs is instrumental to economy growth.

Responses from the questionnaires administered revealed that most SMEs prefer internal source of finance to external source of finance. This could be as result of cheap cost of obtaining it and other reasons. The problem is that this internal source of finance is not enough to satisfy the capital needs of SMEs in a competitive environment. My suggestion is that more research needs to be carried out in the area of the effect of combine sources of finance on performance of SMEs in a turbulent environment.

In line with this research work and findings, T hereby recommend the following to the concerned authority so as to ensure that the inestimable contributions of SMEs to economy growth are achieved. The authority, as a matter of urgency, should relax the interest rate to cater for SMEs funds requirement. The central bank should encourage commercial banks to give long term loan to SMEs without demanding for expensive collateral security. The SMEs should fine-tune more friendly strategies of securing the long term loans. The small and medium enterprises (SMEs) need to be informed and encouraged to always keep records in conformity with required accounting standard. This will afford the government to give necessary supports to the SMEs.

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