Effect of Short-term Debt Financing on the Financial Performance of Small and Medium Enterprises in Bomet County

Abstract

The pillar of economic prosperity and economic transformation is associated with growth and performance of Small and Medium Enterprises (SMEs). The massive growth among the firm translates to economic development. SMEs are the game-changer in global market trends, innovation and transformation. Additionally, majority of SMEs relies on short-term debts for the financial performance and strives toward an empirical balancing to ensure optimal level of debts and equity. SMEs have spearheaded the crucial economic transformation to Kenya’s economy. The objective of the study was to explore the effect of short-term debt financing on financial performance of SMEs in Bomet County. Theories underpropping the study include trade-off theory, stewardship theory and pecking order theory. The theories blueprint the importance of quality financing and protection of resources for business productivity. Data was garnered, analyzed and presented using descriptive research design. The design reinforced the study credibility, complete and the accurate information. The study targeted 75 SMEs however, complete data was obtained from only 59 SMEs. Hence, the secondary data relating to SMEs overdraft, lease finance, trade credit and performance was collected over a period 5years (from 2017 to 2021). Diagnostic tests were done for normality, multicollinearity and autocorrelation. The tests helped in conclusion and ascertaining if data met the designed rules. The model summary of regression tabulation postulated R of 0.784. This accentuates that the correlation amid the regressor verse the regressed variable is strong. Moreover, it explains the importance of selected predictor in explaining the predicted factor. Furthermore, R-square of 0.614 hence pinpointing the magnitude of regressor variables. Empirically, it posits that 61.4% of variation on the financial performance relates to; lease finance, short term loans, overdraft, and trade credit. It is imperative to conclude that 38.6% of the differences on financial performance are affected by varying determinants not captured in this assessment. Furthermore, the coefficient of determination illustrated the crucial parameter defining the existing model. The mathematical techniques postulated an autonomous value of 0.220. Therefore, the financial performance is 0.220 whenever all factors remain unchanged. Furthermore, a unitary change in overdraft leads to an increase in financial performance by 1.7% whenever other determinants are held constant. Moreover, an addition of a single unit of short-term loans translates to negative consequences on financial performance by 31.3% whenever all the other enablers are held unchanged. A unitary advancement in trade credit translates to the positive change of 10.5% on financial performance whenever all other determinants are kept constant. In summary, an addition of lease finance by one unit triggers the increment in the financial performance by 4.7% if all the influencers are held unchanged. What policy recommendations do you make? The study recommends a study on effect of short-term liability and growth, short-term digital loans and the financial performance of SMEs.