Since small and medium enterprises (SMEs) are less likely than large firms to raise funds from the stock and bond markets and have relatively lower profit margins they rely more heavily on borrowing from financial institutions. Japanese SME borrowing increased through the 1980s and 1990s but since then SMEs’ dependence on borrowing has been declining, reflecting a trend towards savings surplus among Japanese firms. Considering the diversity of SMEs, we focus on firms at both ends of the distribution in terms of their dependence on debt, namely, zero leverage firms and insolvent or zombie firms. The proportion of zero leverage firms has significantly increased over time, particularly in the 2000s. Zero leverage SMEs are characterized by high profit margins but low capital investment and growth orientation. Therefore, even though these firms do not borrow it is unlikely that they face strong financial constraints. An important issue is how to best stimulate these firms’ demand for funds. There also exist a number of insolvent and zombie firms. While the ratio of insolvent firms in the Japanese economy has remained high since the late 1990s the ratio of zombie firms declined from the 2000s until the COVID-19 pandemic.