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There are numerous ways for companies to finance their maintenance and expansion. Capitalization structure is the proportion of debt and equity, and a bigger percentage of one or the other companies can be divided into high-leverage and low-leverage groups. Low-leverage companies often have a conservative capital structure that is usually defined by lower growth rates than an aggressive capital structure, for example. However, it is often better for small businesses to establish a conservative capital structure.
Conservative capital structure offers small businesses several benefits that may help businesses grow steadily. The most important factor is that small businesses with conservative capital structures usually have smaller debt. As Dilak (2018) claims, they try to improve their welfare, [and] reduce the companys debt (p. 464). Therefore, it is arguable that smaller and medium businesses should have a conservative capital structure because it is associated with smaller risks, even though the growth rate is lower compared to other capital structures. According to Dilak (2018), many small and medium businesses in Indonesia tend to have conservative capital structures. Even though this example might not be relevant to the entire world, it still may serve as an argument that a conservative capital structure is a common choice for smaller companies.
Nevertheless, some businesses are hesitant to follow this capital structure and turn to a high-leverage structure. I suppose they do it because an aggressive capital structure allows for a faster growth rate. However, it is also associated with bigger risks and lower flexibility due to the higher debts. For small and medium businesses, it is better to have a conservative capital structure since they cannot afford such high risks as bigger businesses can.
Reference
Dillak, V. J. (2018). The capital structures of small and medium companies in Indonesia. In Proceeding of International Seminar & Conference on Learning Organization.
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