The Effect of Crowd Funding on Financial the Performance of Small and Medium Enterprises in Nairobi County

Abstract

The supply and demand for finance is actually out of sync, primarily due to financial institutions like commercial and investment banks that underserve small businesses. Small and medium-sized enterprises (SMEs) are said to exhibit inherent riskiness and vulnerabilities, including inadequate capital and weak business planning. However, since SMEs usually include a significant portion of the business community, they serve as the foundation of an economy. Crowd funding is a relatively new phenomenon in the financial services sector, but it became popular as a substitute for traditional bank financing when the global financial crisis of 2008 led banks to reduce riskier lending, including loans to start-up businesses. Therefore, the effect of crowd funding on Nairobi County SMEs' financial performance was investigated. The following were the independent variables: reward, debt, equity, and donation crowd funding. The financial performance was measured using the ROA, which was an appropriate statistic for SMEs' performance. Using a data collecting form, 90 SMEs provided secondary data for the study. The variables’ coefficient of determination is strong at R=0.524 suggesting that the association between the variables that is, ROA and crowd funding are strong. The proportion change in the dependent variable is described by the R square value of 0.524, which shows that 52.48% of the change in ROA is attributable to crowd funding. However, the independent factors account for 47.6% of the changes. This study offers solid proof that the success of crowd funding does, in fact, improve a person's capacity to secure outside money. However, it should be mentioned that if venture money is made available to them, many entrepreneurs might choose not to seek crowd funding. If crowd funding enables those entrepreneurs who would not have been able to get investment to prove their worth in the market, it could increase market efficiency.