1 Small Business Financing. Financial preferences throughout the life cycle of a firm Maurizio La Rocca 1 , Tiziana La Rocca, Alfio Cariola University of Calabria (Italy) ABSTRACT In this paper, the strategic financing choices of small businesses are examined through the lens of the business life cycle. The growth of small and medium-sized firms, i.e., those most vulnerable to information and incentive problems, is often constrained by the lack of access to external finances. Understanding the financial determinants of small and medium-sized firms at different stages of the business life cycle allows managers and policy-making institutions to correctly support firm growth. Here we argue that the controversy in the empirical literature on the determinants of financial decision- making is based on a failure to take into account the different degrees of information opacity, and, consequently, firms’ characteristics and needs at specific stages of their life cycles. The explanatory power of financing theories based on informational opacity is therefore highlighted and tested in this study. The results of an inductive approach based on cluster analysis showed that, in a bank-oriented country, firms tend to adopt specific financing strategies as they progress through the phases of their life cycle, and that a firm’s financing strategy is influenced, among other factors, by asymmetric information considerations and the role of financial institutions. Thus, firms follow a “pecking order” of financing over time. Young firms have inadequate internal financial resources to sustain growth and thus do not or, because of financial constraints in the capital market, are unable to seek new equity finance. Contrary to conventional wisdom, debt is fundamental to growth in the early stage of a firm. During their mature stages, firms rebalance their capital structure, substituting debt for internal capital. Therefore, start-up and young firms need an increasing amount of debt to sustain their growth, while they rebalance gradually their capital structure after a consolidation of the business. The pecking order theory seems to do not apply for young firms, where debt seems to be at the first place; by contrast, this theory has a high magnitude for firms that have consolidated their business. Key words: Financing decisions, source of finance, capital structure, financial growth cycle, small and medium sized firms. JEL Code: G30, G32 EFMA Code: capital structure - 140 1 Maurizio La Rocca, Assistent Professor Business Economics and Finance Ph.D., Università della Calabria - Campus di Arcavacata, Cubo 3C, 87036 Rende (CS), m.larocca@unical.it