Determinants of Choice of Source of Entrepreneurial Finance for Small and Medium Size Enterprises. Survey of Thika, District Kenya

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 xvii 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.