Relationship of precrisis financial decisions with the financial distress and performance of small- and medium-sized restaurants during COVID-19

Abstract

Based on the trade-off theory of capital structure and the information asymmetry theory of business financing, we evaluated the association of informal financing with the financial performance of small- and medium-sized enterprises (SMEs) in the restaurant industry. This study collected survey responses directly from small- and medium-sized restaurant owners (n = 178) during the COVID-19 pandemic. The findings of the study suggested that reliance on “family, friends, relatives, and third-party lenders” for financing was associated with lower financial performance during a crisis for restaurants. Results were robust when controlled for the owner’s gender, business affiliation, firm age, and relative firm size. Furthermore, we also found that the relative firm size of SMEs moderated this relationship such that, for mid-sized firms ($2–5 million annual revenues), the negative association with financial performance was lower than that for smaller firms (<$2 million annual revenue) and larger firms (>$5 million annual revenues). This article theoretically contributes to the literature by investigating the influence of informal financing on a firm’s performance, and the role of relative firm size within the category of SMEs in this relationship. Findings from the study provide practical guidance for SMEs and informal lenders.