Financial vulnerability as a determinant of funding source diversification in European firms

Purpose This study aims to analyse the relationship between the funding source diversification and the vulnerability of European companies in recent years. It examines how business vulnerability and the characteristics of companies (size, sector, age) influence the number of financing sources that companies use. Design/methodology/approach This analysis relies on an econometric framework using a negative binomial regression estimated with data from the SAFE survey. The model controls for potential endogeneity issues and demonstrates strong robustness after undergoing the relevant validation tests. Findings The results show that the size and sector of the company are decisive in explaining diversification. It also confirms that business vulnerability is positively associated with greater financial diversification. In addition, it was observed that, during times of uncertainty companies tend to increase diversification of their financing sources. Although the analysis covers companies of different profiles, small and medium-sized enterprises stand out for their particularly marked response to situations of vulnerability, which highlights the need to understand their financial decisions in contexts of greater restrictions. Research limitations/implications Based on the findings, the study propose key considerations for both financial management and public policy design. Managerially, firms must shift form reactive crisis management to proactive financial diversification. Concurrently, policymakers should design targeted programs that address firm heterogeneity, ensuring vulnerable businesses receive adequate support. Together, these strategies promote resilient financial structures and protect the broader business fabric form the dangers of single-source dependency. Originality/value This research contributes to the literature by jointly analysing financial vulnerability, firm characteristics and financing-source diversification for European companies using recent SAFE survey data. It provides novel evidence on how vulnerability drive diversification decisions.