Effect of Debt Financing on the Financial Performance of Small and Medium Enterprises
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Date
2023-06-05
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A.A.U
Abstract
This study was conducted to examine the effect of debt financing on the financial performance of
small and medium enterprises. The study employed explanatory and descriptive research designs
in combination and used statistical sampling method to determine the size of the sample and
selected sample through convenient sampling method. The study has used return on assets as a
dependent variable and independent variables are total debt, long term debt, short term debt,
firm size and firm age. Forty six small and medium enterprises selected from Kirkos sub city and
five year data collected from SME development office, trade office and revenue office of the sub
city. The fixed effect linear regression model was applied to identify the effect of debt financing
on the financial performance of SMEs. The result of the study indicates that total debt has
positive effect on the financial performance of small and medium enterprises, furthermore the
research identified that long term debt has positive effect on the financial performance of small
and medium enterprises, in contrast short term debt has negative effect on the financial
performance of SMEs. In addition the study also examined that firm size and firm age has a
positive effect on the financial performance of SMEs. Finally, the research recommends that
SMEs should employ debt financing, specifically long term debts as source of their capital mix,
and government and other stakeholders should facilitate access to debt finance sources.
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Keywords
Small and Medium Enterprises (SME), Return on Asset (ROA), Debt Financing.