UNDERSTANDING SME FINANCING DECISIONS: A CONCEPTUAL FRAMEWORK OF DRIVERS AND BARRIERS IN EMERGING ECONOMIES

Abstract

Small and Medium-Sized Enterprises (SMEs) play a vital role in economic development through their contributions to employment generation, entrepreneurship development, innovation, and national productivity. Despite their economic significance, access to external financing remains one of the most persistent challenges facing SMEs, particularly in emerging economies. Financing constraints often limit business expansion, technological adoption, and long-term competitiveness, thereby reducing the potential contribution of SMEs to economic growth. This paper aims to develop a conceptual framework that explains the drivers and barriers influencing SME financing decisions in emerging economies. Using a conceptual review approach, the study synthesises evidence from existing literature on SME financing behaviour and examines the factors that encourage or discourage entrepreneurs from seeking external financing. The findings reveal that financing decisions are influenced by a combination of entrepreneur-related factors, firm-specific characteristics, banking relationships, and macroeconomic conditions. Key drivers include financial literacy, educational attainment, business experience, profitability, stable cash flow, growth opportunities, strong banking relationships, government support programmes, and favourable economic conditions. Conversely, major barriers include inadequate financial knowledge, weak financial performance, collateral constraints, information asymmetry, limited financing availability, procedural complexity, financing costs, and perceived financial risk. The study further demonstrates that many drivers and barriers represent opposing manifestations of the same underlying determinants, suggesting that SME financing decisions are shaped by the dynamic interaction between enabling and constraining factors. Based on these findings, the paper proposes an Integrated Conceptual Framework of SME Financing Decisions that consolidates the principal determinants identified in the literature. The framework contributes to a more comprehensive understanding of SME financing behaviour and offers practical insights for policymakers, financial institutions, and entrepreneurs seeking to improve financing accessibility and promote sustainable SME growth in emerging economies.