Abstract:
This study examines the determinants of choice of source of entrepreneurial finance
for small and medium sized enterprises (SMEs) in Thika district of Kenya. The
study had four objectives which were to evaluate the effect of firm size on the choice
of source of entrepreneurial finance, investigate the effect of information availability
on the choice of source to entrepreneurial finance; to evaluate the effect of cost of
the source of finance on the choice of source of entrepreneurial finance and to assess
the effect of purpose of finance on SMEs choice of source of entrepreneurial
finance.
This study adopted mixed research design. The population of interest was a total of
approximately 800 SMEs. Stratified random sampling was used and 259 SMEs were
selected. The survey instrument was a questionnaire administered to the owners or
finance managers or their designated backups.
Analysis of the data was by descriptive statistics and inferential statistics. Logistic
regression determined the probability of the entrepreneur choosing between equity
and debt financing options. The study determined that information availability,
purpose of finance and cost influenced the choice of source of entrepreneurial
finance while size had no influence.
The study recommended that small- and medium-sized enterprises focus a lot more
on optimizing their size in order to maximize on the potential to increase value along
their chain of activities and enhance profitability. On information availability the
study recommended that the entrepreneurs should adopt medium of communication
that would lower the perceived risk in financial transactions especially that
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perceived in assuming debt capital. The recommendation on cost revolved around
SMEs being able to access different sources of finance shifting from the more
convenient forms of debt such as overdrafts to alternative forms of borrowings that
have less severe penalties such as from family and friends. Further the study
recommended that SMEs clearly assess the company’s current and future strategy to
determine finance purposes that would give the SME a competitive advantage; that
is entrepreneurial finance.
