Financial Leverage And Loan Repayment Among Small And Medium Sized Enterprises In Kakamega County, Kenya

ABSTRACT

Small and Medium sized enterprises (SMEs) are considered important in both developed and developing countries. Due to increased level of unemployment in Kenya, many individuals have engaged in Small and Medium Enterprises as source of employment. Given the status of the business environment where the competition is intense, SMEs need adequate financial resources to survive. To meet their financial needs, SMEs have sought financial leverage from financial institutions such as commercial banks, SACCOs, micro financial institutions, self-help groups, mobile money and others. Despite these efforts most of these SMEs have challenges such as loss of property due to loan repayment default. Some SMEs are denied loans and this has contributed to their closure in their first year of establishment. While debt is necessary for the free flow of cash in the operation of the SMEs, over proportion of debt in their financial structure may pose problem to their financial health and performance. The main objective of the study was to determine the effect of financial leverage on loan repayment among small and medium sized enterprises in Kakamega County. The study was guided by the following specific objectives; to determine the effect of SMEs debt to equity ratio, interest coverage, capital allocation and debt ratio on loan repayment among small and medium sized enterprises Kakamega County, Kenya. The study was anchored on the Pecking Order Theory, Trade off Theory and Commercial loan Theory and employed descriptive research design. The target population was all the SMEs licensed by county government of Kakamega with single business permit. The study used a census survey in which all the small and medium sized enterprises licensed by the county government of kakamega were studied due manageable numbers involved. The study collected primary data using structured questionnaires which were administered using drop and pick later method. Pre-test and expert judgment was used to enhance validity while reliability was measured using Cronbach Alpha coefficient. The collected data was analyzed using both descriptive and inferential statistics and presented using tables, charts, graphs, percentages, frequencies, and mean. The study concluded that financial leverage significantly and positively influenced loan repayment among the medium sized enterprises in Kakamega County. The study further concluded that to a significant extent the firms had optimum loan compared to total equity to enable loan repayment, are able to repay their loans with the current total debt and total equity ratio and manage their ratio. The study concluded that to a significant extent interest coverage influenced loan repayment among the enterprises since it was affordable allowing them to improve their earnings, borrow more and promptly repay the loans. It was concluded that the firms to a significant extent embrace diligent capital allocation to profitable assets, long-term debts and having an investment policy which increased their returns, net profit margin and ability to service debts. Further it was concluded that the firms have maintained a positive ratio between current assets and current liabilities which has improved their debt repayment and reduced the liabilities. It was recommended that the firms need to maintain a positive debt to equity ratio which will enhance their solvency hence improved performance and ability to cover liabilities. The firms need to take advantage of low interest rates or seek options of lenders who have cheaper rates to reduce the cost of borrowing. The firms also need to allocate more of their capital in acquisition of assets and also reduce their current liabilities all aimed at improve their liquidity and ability to repay debts. The firms further need to reduce their total debt ratio by ensuring all current assets are more than current liabilities. This can also be done by improving asset based and investment policy.