Financing Options and Financial Performance of Small and Medium Enterprises in Nanyuki Town, Kenya
Ndemi, Emily Gakatha
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The role of SME in the economy cannot be gainsaid and whereas it is a key pillar of the economy and sustains many families in Kenya, the sourcing of credit for SMEs has always been problematic and comprehensively studied with an increasing bias towards the constraints the SMEs encounter in accessing funding from commercial banks and other lending institutions. There exist many studies on determinants of performance of SME and aspects influencing financial profitability of SMEs in Kenya. However, hardly any of these studies has addressed the constrains that the SMEs face in accessing financing from different sources and how this is related to their performance. Most of the studies dwell on industry or macro- economic variables in the economy and how they affect the SMEs. The study investigated the effect of financing options on the financial performance of SMEs in Nanyuki Town, Kenya. Specifically, the study assessed the effect of formal financing, personal financing, informal financing and government funds on financial performance of SMEs. Financial performance of SMEs was evaluated from a liquidity and profitability point of view for more objectivity. The study was conducted in Nanyuki town which has a fine mix of thriving SMEs that are the drivers of economic life in the town. The target population was made up of the SMEs and their owners in the town. The study targeted 765 SMEs in Nanyuki town. The sample was picked using stratified sampling technique. A sample of eighty-eight respondents was selected. Information was collected using questionnaires deployed utilizing fall as well as choose technique. Data was examined utilizing regression analysis and descriptive statistics aided by SPSS software version 21. The data was presented using tables, graphs, charts and written discussion. Correlation analysis as well as ordinary least squares regression were employed to determine effectively the effect and nature of associations between the variables. The study found poor liquidity condition for the SMEs with both the current ratio and quick ratios standing 1.47:1 and 0.55: 1 respectively which are below the globally accepted standards. The profitability of the SMEs was also relatively low with the return on assets standing at an average of 6.67%. Regression analysis results indicate that financing options had significant effect on financial performance of SMEs. The Pearson correlation analysis findings further specified a positive association between all financing options assessed and financial performance of SMEs. The study concludes that the poor state of financial performance indicated by both profitability and liquidity of SMEs could be attributed to financing options among SMEs. Formal financing moderately enhances the financial performance of SMEs. The study also concluded that informal financing was a key source of SMEs’ finance. A conclusion was further made that consumption of informal finance serves to greatly enhance the financial performance of SMEs. Additionally, the study concluded that personal financing was a very significant facility in financing SMEs’ operations which strongly drives the financial performance of SMEs.