Impact of debt financing on financial performance of small and medium Enterprises in Kisii Central Sub-County

Abstract

The choice of financial structure and financial management has a greater effect on the financial performance of most firms in the world and in particular Kenya. While most firms try to find a solution to balancing both, financial structure choice and its impact on financial performance remains a greater dilemma to all small and medium enterprises in Kisii County. This was a descriptive survey and questionnaires were used in collecting data from the respondents. Random sampling was used as the general sampling technique with the aid of the Yamane’s formula to select 109 SMEs to participate in the study from a target population of 150 SMEs in Kisii Central Sub-County. Statistical package for social sciences (SPSS version 23) was used to analyze both qualitative and quantitative data that was collected during the study. The owner controls the business and enjoys profits whenever it’s high and bears the risk alone. It does not entail any charge. This therefore shows equity capital forms higher proportion of financial structure hence has a significant effect on financial performance of SMEs. From the study retaining earnings was well appreciated irrespective of not having a significant effect on financial performance due to challenges of raising it. It stands a chance of being the best source of finance for expansion because it is the cheapest and painless method of raising additional capital. Management of SMEs should ensure that the financial structure of the firm is always at optimum. The firm cannot only survive on equity capital due to its low risk, also cannot wholly depend on debts due to high risk, more so retained earnings is only realized after making profit