What sources of finance are firms least likely to use?

• We present an empirical test of the pecking order theory (POT), financial life-cycle theory and the ‘contentment hypothesis’. • We use a rich UK data set to examine the extent to which firms do engage, or not, with a wide range of different sources of finance at some point in their lives. • Firms had a strong and permanent level of non-use of bonds, P2P, external equity and factoring, but relatively high use of short-term debt. • Firm size was more consistent with POT and financial life-cycle theories than firm age. But in general, it was not the smooth transition from internal finance to debt, through to more complex sources of finance. • The presence of new investment opportunities reduces firms' probability of non-use of most sources of finance. The financing of firms has attracted much attention in capital structure and life-cycle theories. However, the counterpart to these theories is the ‘contentment hypothesis’ which suggests that non-engagement with capital markets is a rational choice for most firms, and only those that desire growth engage with the market. In this paper we examine the extent to which firms use thirteen alternative sources of external financing using a large UK dataset. Our findings show that 99.5 % never use bonds, 96.8 % P2P, 93.6 % external equity, and 92.7 % factoring. When firms do use external finance, it is largely short-term forms of debt. This suggests that capital structure and life-cycle theories are too expansive and do not reflect the true nature of firms' engagement with capital markets.