Effects of Business Planning on Repayment of Loans by Small and Medium Enterprises: a Case Study of Electrical Businesses in Lower River Road, Nairobi

Abstract

Micro, Small and Medium Enterprises (MSMEs) play an important role in both the developed and developing countries. Despite their significance in economic growth and development, MSMEs are faced with various challenges including lack of finance due to low capitalization, lack of access to market information, poor management and planning. The aim of this study was to assess the effects of business planning on repayments of loan by small and medium enterprises (SMEs) in Lower River Road, Nairobi. Objectives of the study were to determine the effects of management planning, financial planning and marketing planning on loan repayment by small and medium enterprises. The study was explanatory and the research design that was employed was a survey. This design was selected due to its suitability in collecting detailed information from a small representative sample where inferences about the target population can be made with minimal margin of error. The population involved in the study were business owners/ and or managers in the 300 SMESs in electrical business along Lower River Road. Simple random sampling was used to pick a sample of 90 businesses. Data collection was carried out by use of structured questionnaires and observations. With the use of SPSS package, data was analysed quantitatively, specifically using descriptive statistics (frequencies, mean, median and mean) and to establish correlation and effects of the variables, regression and correlation tests were carried out. From the findings, it was established that all the three variables; management planning, financial planning and marketing planning play a very crucial role on the repayment of loans by SMEs. Specifically, it was found that these variables account for 40.0% of the repayment of loans. More so, the relationship between the independent and dependent variable was found to be very significant with significant value. As a result, a number of recommendations were made, which included the following: that banks should not consider collaterals and securities as the main support for lending out funds to borrowers since realization of these assets are difficult, and that best practices should be shared with SMEs on how to efficiently manage disbursed loans. In addition, the cost of loans should be reviewed downwards to enable smooth repayment and increase in the demand for loans by SMEs to enable growth in their business.