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Abstract:
Small and Medium-sized Enterprises (SMEs) are considered to be the major source of dynamism, innovation and flexibility in emerging and developing countries, since they have the potential to contribute significantly to economic growth and poverty reduction in a country through increased productivity and employment.. However, the survival and growth of the SMEs largely depends on their ability to access finance. Evidence shows that SMEs in most developing countries face a financing gap related to difficulties in their access to finance that undermines their economic prosperity. This study sought to determine the factors that influence funding of SMEs in the Retail Sector in Nairobi, Kenya. Specifically, the study sought to establish the effect of ownership structure and collateral on the funding of SMEs in the Retail Sector in Nairobi, Kenya. The study used a descriptive research design and was based on primary data collected from management staff of the sampled SMEs using a self administered questionnaire. Cluster sampling and simple random sampling techniques were used in sample determination. The clusters were based on the type of ownership structure of the business and included sole proprietorship, partnership and limited liability companies. An OLS regression analysis model and Pearson correlation were used to determine the relationship between the study variables. There were 31 sole proprietorships, 9 partnerships and 3 limited liability companies. The study established that ownership structure and collateral had a positive relationship with the SMEs' access to funding. The study found that most SMEs held motor vehicles, buildings and land as their collateral. Further it was found that most SMEs are owned by individuals either as sole proprietorships or partnerships. The study established that lack of separation between the firm and the owner affected the financing of SMEs and that privately held firms were likely to use more flexible financing instruments without others taking control in the firm. In addition, the study found that most of the SMEs received loans that were far much less than requested for due to lack of adequate collateral. The study concluded that SMEs' inability to access external funding was due to lack of collateral and that incorporation was associated with increased access to external funding given that incorporated firms had the ability to issue stock and their stockholders had the freedom to resell their stock which facilitated their process of accessing external finance for expansion. Based on the study findings the study recommends that SMEs should strive to own more tangible assets that can create higher value on their firms to accelerate borrowing security since the higher the value of assets the lower the interest rates of the debt to be secured by those assets. In addition, owners and managers of the SMEs should consider incorporation of their firms to increase their funding sources to issue of stocks. Further, incorporation would imply that the SMEs are able to benefit from adherence to strict financial reporting provisions and independent legal status which would in turn enhance their chances of accessing more external funding.
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