Effect of Financing Decisions on Financial Performance of Small and Medium Enterprises in Nairobi City County, Kenya

Abstract Small and medium enterprises play a role in contributing to the development of the economy through job creation, poverty eradication, wealth creation as well as the creation of new businesses. However, SMEs have significantly high incidences of illiquidity and lack of credit access. Over the last two decades, alternative sources of SME financing have emerged and include equity, short-term debt, long-term debt, and internal financing. Nonetheless, despite the availability of these sources of financing, SMEs in Kenya are still experiencing poor financial performance. This study, therefore, sought to investigate the influence of financing decisions on the financial performance of SMEs in Nairobi City County. The study sought to determine the influence of equity financing, short-term debt, long-term debt, and internal financing on the financial performance of small and medium enterprises in Nairobi City County. The study sought to determine the moderating effect of firm characteristics on the relationship between financing decisions and the financial performance of small and medium enterprises in Nairobi City County. An explanatory research design was used in this study. The unit of analysis was the top 100 small and medium enterprises in Nairobi City County. Stratified random sampling was used in the selection of 80 SMEs from the target population. This study used secondary panel data, which was collected by the use of a data extraction tool. Analysis of quantitative data was done by the use of inferential and descriptive statistics with the help of statistical software known as Stata version 14. This was followed by inferential statistics which included multivariate regression analysis. The results were presented in figures (bar charts and pie charts) and tables. The study found that equity financing has a positive and significant influence on the financial performance of SMEs in Nairobi City County. The study also established that short-term debt has a positive and significant influence on the financial performance of SMEs in Nairobi City County. In addition, the study established that long-term debt has a positive and significant effect on the financial performance of SMEs in Nairobi City County. Also, the study revealed that internal financing has a positive and significant effect on the financial performance of SMEs in Nairobi City County. The study recommends that the management of small and medium enterprises should make use of equity financing whenever they want to explain their businesses and when they are financing different projects including product development and internal business process improvement. Also, the management of small and medium enterprises should obtain loans from banks, Sacco’s, and microfinance institutions to finance their operations. Moreover, the study recommends that the SMEs in Nairobi City County should avoid obtaining short term loan since these loans have high interest which requires to be paid for a brief period of time and hence may negatively affect the financial performance of the SMES. The study recommends that the management of small and medium enterprises should seek to increase the total assets of their organization so as to enable them to obtain loans from financial institutions to grow their business and improve financial performance