Analysis of the effect of Financial Leverage on Loan Repayment among Small and Medium Sized Enterprises in Kenya

Abstract

This study sought to analyze the effect of financial leverage on loan repayment among Small and Medium Sized enterprises in Kenya. The study was guided by the following specific objectives; to determine the effect of SMEs debt to equity ratio, interest coverage, capital allocation and debt ratio on loan repayment among small and medium sized enterprises Kakamega County, Kenya. The study was anchored on the pecking order theory. The study used a census survey. The study collected primary data using structured questionnaires. The collected data was analyzed using both descriptive and inferential statistics. The study concluded that financial leverage significantly and positively influenced loan repayment among the medium sized enterprises. The study further concluded that to a significant extent the firms had optimum loan compared to total equity to enable loan repayment, are able to repay their loans with the current total debt and total equity ratio and manage their ratio. The study concluded that to a significant extent interest coverage influenced loan repayment among the enterprises since it was affordable allowing them to improve their earnings, borrow more and promptly repay the loans. It was concluded that the firms to a significant extent embrace diligent capital allocation to profitable assets, long-term debts and having an investment policy which increased their returns, net profit margin and ability to service debts. Further it was concluded that the firms have maintained a positive ratio between current assets and current liabilities which has improved their debt repayment and reduced the liabilities. It was recommended that the firms need to maintain a positive debt to equity ratio which will enhance their solvency and there is need to allocate more of their capital in acquisition of assets and also reduce their current liabilities all aimed at improve their liquidity and ability to repay debts