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Small and Medium-Sized enterprises (SMEs) financing patterns are being debated. Academic discussion on financing patterns started with the theory presented by Miller and Modigliani (1958). The theory passed evolutionary stages and corporate financing behavior was observed but still there are nuances and literature is inconclusive about SMEs financing patterns. This study aims to investigate the determinants of financing patterns in the SMEs of SAARC countries. It further investigates the association between financing patterns and firm’s performance. Four objectives are focused in the study which are (i) To empirically investigate the role of different factors including ownership structure, firm’s legal status, financing constraints, and firm’s demographics in determining working capital financing patterns (ii) To investigate the role of different factors including ownership structure, firm’s legal status, financing constraints, and firm’s demographics in determining fixed asset financing patterns (iii) To investigate the role of working capital financing patterns in determining firm’s financial performance (iv) To investigate the role of fixed asset financing patterns in determining firm’s financial performance. To achieve objectives of the study two stage model is used and secondary data from World Bank enterprise survey website is acquired. First stage of the model is used to achieve the first two objective while second stage model is used to achieve the last two objectives. Moreover, Population of the study comprises SAARC countries SMEs whereas, sample frame consist of Pakistan, India, Bangladesh and Sri Lanka. 6777 SMEs were sampled using Stratified random sampling technique. Results indicate that firm’s demographics including age, size, location and industry significantly determine working capital financing patterns. Ownership structure also affects working capital financing patterns. Among legal status variables sole proprietorship is the most significant determinant while deciding working capital financing patterns. Furthermore, firms with low financing constraint use more debt compared to those having no constraints while firms with high constraints use less external resources to finance working capital compared to those having no financial constraints. Firm’s demographics significantly determine fixed asset financing patterns. Among ownership structure variables only state owned have significant impact on financing patterns of fixed asset whereas, legal status variables seems less important. Firms with low financing constraints use more external finance for fixed asset financing compared to those having no financing constraints. Results of Second stage of the model depicts that financing working capital with banks increase sales growth while decrease with friends and family financing. Similarly, financing fixed asset with formal sources of finance increases sales growth. Keeping in view the results it is recommended that policy makers at country level should take corrective measures to facilitate SME’s owners because imperfections in capital markets bound SMEs to rely on banks and informal financing. Commercial Banks and micro finance institutes should also amend the loan approval process and other requirement to alleviate the hurdles face by SMEs while obtaining finance. Supply side barriers like higher transaction cost and limited branches of banks stop SMEs from obtaining loan. So, alleviating these problems might open new doors of growth and innovation for SMEs. In summary the determinants considered in the study play significant role in deciding working capital and fixed asset financing patterns in the given sample. Similarly the financing patterns determine firm’s performance.
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