| dc.description.abstract | Small and Medium Enterprises (SMEs) use different sources of financing. Some of them
emerging to be a challenge to the performance of the SME since most SME owners’ lack
necessary knowledge on which sources of finance enhances financial performance. Despite
SMEs using different sources of financing some of them are still not growing and others are
collapsing, majority of SME owners do not have ideas on how debts and internal sources of
finance influences their financial performance. Therefore, this study aimed at analyzing the
effect of SME capital structure on financial performance. Specifically, this study assessed effects
of SMEs capital structure on their profitability, effects of SME capital structure on their liquidity
and effects of SME capital structure on their sales growth. The study was informed by pecking
order theory. The study targeted 295 SMEs which are registered as companies in Nakuru town.
Stratified sampling was applied for allocating samples in different strata. The sample size
selected under proportional allocation was 170. Secondary data was collected from financial
records of SMEs. Documentary guide aided in data collection. Descriptive statistics such as
mean and standard deviation and inferential statistic such as Pearson correlation and multiple
regression model was used in analyzing data. The findings revealed that capital structure had
negative effect on firm profitability. However, capital structure had positive and significant
effect on firm liquidity. Similarly, capital structure indicated a positive effect on sales growth.
Based on the study findings, under increased capital structure firm profitability decreases. On the
other hand, under increased capital structure, liquidity and growth in sales increases. Thus, SMEs
owners should utilize funding from investors by providing insights, resources, accountability and
updating sales accounting data. Moreover, firms should avoid situations where they are highly
leveraged since this may lead to bankruptcy if they are unable to make payment on their debt and
SME owners should also make good investment decisions in order to increase profitability. | en_US |
