Effects of Debt Financing on Financial Performance of Small and Medium-Sized Enterprises in Homa Bay Town, Kenya

Abstract

The SMEs in Kenya account for 98% of businesses and create about 30% of jobs annually. Many SMEs face challenges of a stable financing cycle, and are unable to adjust to sales cycles that are available in the market, hence affecting their financial performance. Although SMEs have numerous accesses to debt financing in Kenya, they still struggle to remain into operation due to poor financial performance. Further, studies also have emphasized that despite the fact that debt financing is readily available in Kenya, most SMEs cannot access them due to lack of collateral and ignorance of the various financing options available in the country. Therefore, this study sought to establish the effect of debt financing on financial performance of small and medium-sized enterprises (SMEs) in Homa Bay Town, Kenya. Specifically, the study sought to identify the effect of long term financing on financial performance of SMEs in Homa Bay Town, identify the effect of trade credit on financial performance of SMEs and examine the effect of short term financing on performance of SMEs in Homa Bay Town. The target population was made up of 825 retail SMEs in Homa Bay Town. The study adopted Yamane's formula to derive the sample size of 296 SMEs. Primary data was obtained from the sampled SMEs using structured and semi structured questionnaires. The study concluded that there is a great effect of debt financing on the financial performance of SMEs in Homa Bay Town, with long term and short term financing having the highest effect and trade credit ranked lowest in terms of statistical significance.