The study analysed the impact of financing patterns (FPs) on the financial performance of 226 SMEs listed on the BSE-SME and NSE-Emerge platforms from the period 2014–2019. Financing pattern is analysed using total debt financing (TDF), long-term debt financing (LTDF), short-term debt financing (STDF), and trade credit financing (TCF), while firm size, age, liquidity, sales growth, and asset tangibility were taken as firm-specific control variables. Return on Asset (ROA) is taken as a financial performance variable, whereas Return on Equity (ROE) is used to confirm the robustness of the result. The least-squares dummy variable (LSDV) variant of the fixed-effect model is used to examine the impact of financing on the performance of manufacturing and service SMEs.
The result indicates that the TDF and STF have a significant negative relationship with ROA, while the LTF has not shown any significant association with ROA. Also, the TCF has shown a significant positive relationship with financial performance. These results confirm that trade credit is being used as an alternative source of finance that positively influences the performance of SMEs. Control variable sales growth, liquidity, asset tangibility, and size show significant associations with ROA in different models of financing patterns. Further, Return on Equity (ROE) confirms the robustness of the result and demonstrates the same direction of the relationship with financing. Thus, the study provides an illustrative description of the relationship between financing decisions and the performance of SMEs. By examining the relationship, a firm’s financial health and the likelihood of default can be assessed, which may provide essential input to creditors and policymakers. Additionally, this study would help guide SME owners in selecting and executing the proper capital structure that can increase their financial performance.