Bank Loans and Financial Performance of Small Business Enterprises in Adjumani District, Uganda

ABSTRACT The main aim of the study was to examine the effect of bank loan on financial performance of small business enterprises, a case study of Adjumani District. It was guided by the following objectives; to examine the effect of commercial loan financing on the financial performance of small business enterprise, to determine the effect ofretained earnings financing on the financial performance of small business enterprise and the effect of Trade Credit financing on the financial performance of small business enterprise in Adjumani district. In the study a cross sectional research design was used, where both qualitative and quantitative research methods were used. The total number ofrespondents who participated in the study was 50 and these were entrepreneurs of small business enterprises. Data was collected from respondents by use of questionnaires and an interview guide as the research instrument. Data was analyzed using tables and descrzptions were done using percentages. The study revealed that acquired assets pays offfunding cost leaving the SBE with the asset value. SBEs in their limited asset base have no potential of securing long term loans as a major instrument of debt financing hence giving it a major constraint in borrowing funds to finance their operations usage offunds increases investment prospects of SBE. Funds also increases chances of $‘BE success, application of this funding reduces agency costs and SBE is able to finance more projects increasing returns. It was concluded that commercial loanfinancing has a positive effect on financial performance and this effect is statistically significant in predicting financial performance of SBEs. SBEs that use commercial loan financing will expand their business operations and experience significant increase in their profitability. Trade credit financing has a positive and sign~Icant effect on financial peiforinance of SBEs. It therefore follows that trade credit is a significant predictor offinancial performance, SBEs that use trade credit in financing their operations are likely to see their output and revenues increase thus increasing their level ofprofitability. The study recommended that investors and managers of SBEs should consider sources of business financing as important determinants offinancial performance. SBEs should come together to form larger groups in order to access bigger commercial loans from banks, microfinance institutions and other lenders which are cheaper to source as they carry lower transaction costs and such costs are shared by S’BEs in the group reducing its impact on individual SME’s financial performance.