Equity Financing And Financial Performance Of Small And Medium Enterprises In Garissa County, Kenya

ABSTRACT

In today’s global environment, Small and Medium Enterprises have limited chances of accessing credit facilities from lending institutions owing to their relatively smaller sizes. The high amount of interest rates charged on loan facilities by lending institutions also limits the ability of SMEs to access credit facilities. The trend in return on asset and return on equity on small and medium enterprises in Garissa is of great concern. The statistics indicates that ROE declined on average from 26% to below 12% in the year 2014-2019. In order to improve on their financial performance, SMEs have therefore resorted to equity financing as an alternative option of accessing funds apart from the use of debts that has proved to be too risky. The researcher aimed to determine the effect of equity financing on financial performance of SMEs in Garissa County, Kenya. The study specific objectives were; to establish the effect of Angel investors, retained earnings, donation and plough back profits on financial performance of small and medium Enterprises in Garissa County. The study was underpinned by market timing chain and pecking order Theory. Descriptive research methodology was used. 3097 small and medium Enterprises in Garissa County were the target population. The respondents of the study were the finance managers, accountants and owners of SMEs. Primary-data was collected by the use of a questionnaire. Content and face validity was enhanced through the help of the supervisor. Reliability test score of 0.7 was done. Statistical package of social science was used for analysis and both descriptive analysis and inferential statistics was presented. The findings was presented in tables, graphs and figures. The findings indicated that majority of the SMEs rarely get funds from Angel investors. The result indicated that there were low costs incurred in selecting Angel investors. The study found that majority of the small and medium Enterprises emphasizes on getting funds from retained earnings. Majority of small and medium enterprises in Garissa had frequently financed their business through retained earnings. It was clear that retained earnings helps in reducing the cost of borrowing for the majority of small and medium enterprises in Garissa County. The results indicated that the small and medium Enterprises are very dynamic and consider donation from different sources in the country. The small medium enterprises in Garissa County are committed in ensuring that the Crowd funding are efficiently and effectively used. The results indicated that the SMEs considered ploughed back profit as a major source of capital. The findings indicated that most frequently the business ploughs back profits from its net profits. Majority of businesses consider investing in various expansion project through the use of the ploughed bank profits. Majority of the small and medium Enterprises indicated that their profits are ways available for use by the businesses. The study concluded there was negative and significant relationship between angel investors and financial performance. The study concluded that retained earnings changes affect positively and significantly the changes in the financial performance. The study concluded that donation significantly and positively effects the changes in financial performance. The study concluded that ploughed back profit was insignificantly related to financial performance of SMEs in Garissa County, Kenya.