Factors Influencing Debt Financing Access by Small and Medium Size Enterprises (SMEs) in Kampala

Abstract

Unquestionably, access to finance from financial institutions is essential for the profitability and sustainable growth of the small and medium enterprises sector (SMEs). The purpose of the study was to ascertain the factors influencing access to debt finance by SMEs in Rubaga, Kampala, Uganda with a view to establishing a coherent model directed at improving SME access to debt finance. The study adopted the cross-sectional/correlational design and intrinsically it was hypothesized that age and trading/borrowing experience of the business, collateral and interest rates positively influence access to debt finance by SMEs with the financial life cycle theory used in conceptualizing this relationship. The study used a respondent sample of 130 SMI_ operating in Rubaga, Kampala whose owners were the unit of enquiry. The Pearson Ran' correlation coefficient and regression analysis were used for data analysis. The findings revealed strong positive correlation between interest rates, collateral requirements for debt acquisition age/trading experience and the access to debt finance by retail SMEs in Kampala. The correlation coefficients were 0.601, 0.600 and 0.644 respectively. The results also indicated that age/trading experience of the SMEs influences debt finance highly since a unit increase in age and trading/borrowing experience of the business improves debt financing access of SMEs by 0.274 units, which is averagely 0.1 units higher than collateral (0.191) and interest rates (0.177). Correspondingly, in view of the latter observation and the realization that financial needs for small businesses change as they grow and gain experience, the study recommends that financiers need to organize regular and comprehensive financial literacy programmes that target growth-specific operations of SMEs and financial statement analysis, among others, would beneficial in that regard.