The effects of selected factors on the choice of capital structure of small and medium enterprises (SMES) in Kiambu County, Kenya

Abstract

This study was on the effect of selected factors influencing the capital structure of Small and Medium Size Enterprises (SMEs) in Kiambu County, Kenya. SMEs play a pivotal role towards the achievement of the broad goals outlined in vision 2030 and are critical drivers towards making Kenya an industrialized country with high quality of life for its citizens. The study observes that despite their significance past statistics indicate that three out of five SMEs fail within the first few months of operation and 80 per cent those that continue fail before the fifth year. The objectives of the study were to determine the effect of firm size, information availability, purpose of finance, cost of finance, and collateral requirement on the capital structure of SMEs in Kiambu County. The study findings will assist Government planners in understanding how to come up with policies that will help the SMEs sector in raising affordable capital; financiers will benefit from the findings by developing a better understanding of the factors that influence the capital structure of SMEs; and contribute to knowledge about financing decisions of SMEs. The study was guided by pecking order theory, and the life cycle approach. This study utilized explanatory research design. The study used proportionate sampling by utilizing a sample of 268 respondents. The data were collected from interview schedules using questionnaires and analyzed using descriptive and inferential statistics (Pearson‟s correlation and regression). The study findings indicated that the size of the business, availability of information, purpose of the finance, cost of capital, and collateral security influenced the capital structure of the firms to great extent and to greatest extent respectively. The research sought to test the hypotheses in order to fulfill the objectives of the study by using logistic regression. All of the null hypotheses were rejected on the basis that the significance of the t-statistic was 0.000 which was less than the p-value 0.05 set for the study. Therefore, all the selected factors had an effect on the choice of capital structure for SMEs in Kiambu County. The study recommended that the Government should introduce targeted legislation that ensures universal access to information by SMEs. In addition, the Government should negotiate favourable interest rates and flexible repayment period to encourage SMEs to borrow from financial institutions.