Equity financing and financial performance of small and medium enterprises in Embu Town, Kenya.

Abstract

Capital structure comprise of a mix of debt and equity. Managers used various combinations of debt and equity that increases the net worth of business at the same time reduces the cost of obtaining finance. Financial decisions affected the financial performance of SMEs but vary from one firm to another. This is due to the limited access to finances and ability of the manager to fully utilize the resources available. SMEs are of significance to the economic development of any state regardless of the development status. Despite their importance SMEs are characterized with slow growth rate and three out of five SMEs fail in their first three years of operation. The continued poor performances have led to decline in growth and eventually death of the SMEs. The growth of the SMEs highly depended on the investment decisions made by the entrepreneurs and lack of access to finances has created financial gaps that have fueled the challenges that SMEs face. The study therefore analyzed the effect of equity financing on financial performance of SMEs in Kenya. The study adopted a descriptive survey research design. The target population of study was 300 SMEs from which a sample size of 60 SMEs was drawn. Pretesting of the research instrument was done to determine the reliability of the questionnaire by use of Cronbach alpha coefficient. Content validity of the questionnaire was used to ensure that the questionnaire answered the research questions. The primary data was collected using self-administered questionnaire while secondary data was obtained from audited financial statements and analyzed by use of SPSS. Data analyzed capture descriptive statistic which included mean, standard deviation and variance. Inferential statistic included Pearson’s correlation and multiple regressions. The study revealed that SMEs had greater preference for contribution from friends and ploughing back profit as a source of equity finance. Angel investors as a form of equity financing has not gained acceptance as a source of finance. From the study it was evident that equity finance had a positive relationship to financial performance of the SMEs. Equity offered a lifelong financing option with no or minimal cash outflow inform of interest. The study also noted that the performance of the SMEs was largely affected by the source of finance and the liquidity position of the business. The study therefore recommended that SMEs should embrace angel investors as equity financiers since they provide the start-up capital to the SMEs. Angel investors also provide managerial and book keeping skills to the entrepreneurs thus enhancing the accountability and efficient use of the financial resources at hand. The financial institutions need to create awareness and educate the entrepreneurs on other products available to finance the SMEs.