Influence of External Financing on growth of Small and Medium Enterprises in Embu county, Kenya

Abstract

The role of SMEs are not only income and employment generating but also breeding ground for entrepreneurs, they have higher employment capacity and not capital intensive, and highly competitive, flexible and innovative (Abay, Tessema & Gebreegziabher, 2014). Micro, small and medium-sized enterprises (SMEs) are a major source of entrepreneurial skills, innovation and employment (Nyang’ori, 2010). Micro enterprises together with small and medium enterprises contribute immensely to the economy of most countries in the world through creation of employment besides contributing to a country’s Gross Domestic Product (Chimuneka & Rungani, 2011). In Kenya, the MSE sector employs around 2.3 million people and generates around 14% of the country’s Gross Domestic Product (Nasirembe, 2007). Chepkemoi (2013) in a study on the effects of capital structure of small and medium enterprises on their financial performance, observed that due to fixed costs of external financing, smaller firms choose to refinance less frequently than larger firms because they are more affected by these fixed costs in relative terms. Hence, small firms choose to operate at a higher leverage level at a refinancing moment to compensate for less frequent re balancing.