Effect of Equity Finance on Financial Performance of Small and Medium Enterprises in Kenya

Abstract

All business enterprises are mostly acknowledged as an important contributor of poverty eradication and increasing economic growth all over the world.Despite the role of SMEs in building economic development in Kenya, they are facing several challenges among them being choosing the best source of finance for their successful performance.Purposely this study was to determine the effect of sources of finance on financial performance of small and medium sized enterprises in Kenya.The specific objectives were; to determine the effect of loans on financial performance of SMEs in Kenya, to identify the effect of trade credit on financial performance of SMEs in Kenya, to find out the effect of equity financing on financial performance of SMEs in Kenya, to establish the effect of informal finances on financial performance of SMEs in Kenya, to determine the moderating effect of firm size on the effect of sources of finance on financial performance of SMEs in Kenya.The target population of the study was 291,449 licensed SMEs in the selected counties by operational wholesale and retail trade.Simple random techniques were used to collect the sample for the study.384 respondents made up the sample and were selected from the six selected counties which comprised of Nairobi County, Mombasa County, Machakos County, Makueni County, Kajiado County and Kitui County.Secondary and primary data were useful to provide information in this study which was either quantitative or qualitative.Through a structured questionnaire data was collected and these questionnaires were dropped and later picked as the method gave respondents enough time to think about their responses carefully without interference.Determining of the reliability of the questionnaire was done by using Cronbach Alpha.The study made use of Statistical Package for Social Sciences (SPSS) version 22.0 to aid in coding, entry and analysis of quantitative data.By using regression and correlation analysis data was analyzed and this helped to test the connection between the independent and dependent variables.Data was analyzed by use of descriptive and inferential statistics and then presented through figures, tables, percentages, arithmetic means, standard deviations and tabulation to show differences in frequencies.The findings revealed that there is a statistical significant relationship between the independent variables which comprised of Loans, Trade credit, Equity financing and Informal financing and the dependent variable Financial performance of the SMEs in Kenya.The study established that the trade credit had the strongest relationship with the financial Performance of SMEs in Kenya, then equity financing, loans and finally informal financing respectively.The study clearly concluded that there is no one source of finance that fully contribute to the financial performance of the SMEs in Kenya.The recommendation by this study was that, the SMEs in Kenya should use the four sources of finance together but should embrace more use of trade credit.

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