Financial Constraints Theory

Financial Constraints Theory suggests that a company’s growth is limited by its access to external funding. When a firm faces difficulties in raising capital—due to risk perceptions, credit availability, or market conditions—it can't invest in new projects or expand as much as it would like. These funding limitations can slow down innovation, market entry, or operational expansion, regardless of the company's good ideas or market opportunities. Essentially, the theory highlights how financial barriers, rather than lack of opportunities or management, can restrict a firm's development.