The capital structure theory has been applied extensively in corporate fi rms with mixed results. This article examines the role of capital structure on the performance of fi rms in South Africa’s agricultural sector following the pecking order theory. Survey data was collected from smallholder farmers in Mpumalanga and North West provinces during 2013. A total of 500 respondents were included in the survey using the multi-stage sampling technique of which 362 responses were received. Using the structural equation modeling approach, the study observes a positive and signifi cant relationship between capital structure and the performance of smallholder farmers. Both short-term and long-term debt contributes to improved productivity through the purchase of working capital requirements and the acquisition of capital equipment. Furthermore, the study reveals that land size has a positive infl uence on agricultural output. These empirical results suggest that channelling debt capital to farmers will improve their productivity. All models fi t indices applied con- fi rm the model was a good fi t to the data.