Abstract
Even though small and medium enterprises contribute significantly to the growth of national
economies, they are vulnerable in their early stages and may fail. Hence younger businesses
are more likely to fail than more established ones because they face complex challenges that
may limit their viability. This is a notion established in the liability of newness framework.
According to the liability of newness concept, the precarious existence of emerging
organisations is due to difficulties in managing relationships among strangers, not quickly
assembling resources, and not coping with difficult environments, among other issues. All
these elements notwithstanding, previous literature suggests that small businesses can, and
sometimes do engage in techniques or approaches to help reduce the liability of newness, such
as raising adequate capital. This study suggests that not only is adequate capital important but
that the right mix of capital also results in higher solvency, thereby mitigating the liability of
newness. Because the various funding forms have distinct advantages and disadvantages, an
appropriate capital structure reduces the cost of financing while increasing the value of the
firm. This study also advances the idea that profitable businesses are productive and financially
strong, and thus nascent enterprises with high profitability can minimise the liability of
newness. As a result, the study sought to examine the influence of capital structure and
profitability on the solvency of nascent small and medium enterprises. To put the study's
hypotheses to the test, 1106 nascent small and medium enterprises that are registered with the
National Board for Small Scale Industries were sampled across three major cities in Ghana.
Thus, data was gathered from every member of the population. Such data, gathered from the
SMEs' financial statements, was submitted to preliminary screening as well as a number of
statistical measurements. Operationally, the dependent variable, solvency, was defined as the
solvency ratio, working capital ratio, and net worth. As a result, three distinct regression models
were developed for robustness. The study's findings broadly indicate that capital structure and
profitability have an influence on the solvency of nascent small and medium enterprises. The
study also determined that emerging small and medium enterprises should follow the principles
of the pecking order theory to reduce the liability of newness. These findings, if adopted by
SME owners, can aid in the maturation of their fledgling businesses.