Capital Structure Decision : A case study of

SMEs in the road freight industry

Companies need capital in order to run their business, do
necessary investments and grow larger. These actions are
combined with high costs where both internal and
external financing might be appropriate. Capital structure
is the relation between debt and equity.
In this thesis we have focused on the decision behind the
capital structure. We have focused on the road freight
industry and we have tried to find out how management
reason about their decision. The purpose of this thesis is
therefore to describe and analyze SMEs’ decision of
capital structure within the road freight sector in the
Jönköping region. Emphasise is put on the different
aspects that influence the capital structure decision and to
what extent this is a strategic issue coloured by personal
beliefs.
To fulfill the purpose mainly a qualitative approach with
primary data from structured interviews has been used.
The interviews were conducted face-to-face with six
owner and/or managers. Further on, secondary data from
the firms’ annual reports were used and analyzed.
The pecking order theory explains that firms, especially
SMEs, prefer to finance their businesses with internally
generated funds. Focus of the theoretical part are on
theories of what factors that affects the capital structure
decision, how this can be argued to be a strategic question
for SMEs, how risk affects the capital structure decision
and how this decision is made in a family business. These
theories are presented to shed light on the capital structure
decision making process of SMEs.
From this study it is found that the majority of the
companies’ prefer internal financing i.e. reinvested
earnings, and as a second alternative to use debt in form
of bank loans. The study also shows that the reasons
behind this preferred order are the will of being
independent, previous experience and managements’ risk-
taking propensity. We believe that these factors combined
with beliefs about debt and realized need for debt works
as a base for how a capital structure strategy is discussed,
formed and developed. From this study it can also be
concluded that risk indirect affects the capital structure
decision and that a restrictive view on debt leads to a
restrictive desire to grow since a fast growth in most
cases needs to be financed by debt. Last, the study
concludes that even though the studied firms prefer to
finance with retained earnings they all use debt more or
less.