ABSTRACT
This chapter introduces the general topic of financial structure in a small firm (Lund and Wright, 1999; Hamilton and Fox, 1998; Tucker and Lean, 2003; Gregory et al., 2005). It starts by considering first the well-known static framework. In this, it recurs to themes of Chapter 5 on funding constraints, and extends that treatment. It then establishes a general underpinning for the analysis of small firm financing over time. This appeals to the control theoretic literature, notably the work of Hilten et al. (1993), which permits the specification of ‘master trajectories’ of key variables over time like output, debt, dividend and capital. Two key trajectories (for cheap debt and cheap equity, respectively) are used to illustrate this type of analysis, showing how financial structure can vary over time, involving phases of growth, consolidation and stationarity. From this perspective, important issues of small firm dynamics and finance are addressed, and then illustrated by reference to selected literature on credit constraints (funding shortages), wealth as collateral, financial structure, target income modelling of start-up, and bank lending during financial liberalisation.
