Determinants of trade credit use by small and medium enterprises in Nairobi

Abstract

This study aimed at investigating the determinants of trade credit use by Small and Medium Enterprises in Nairobi. The SMEs are normally thought of as the breeding ground for entrepreneurs and constitute an essential component of a healthy economic structure. The literature reviewed suggested that the main factors that determine the use of trade credit include; transaction cost motive, firms operating issues, finance cost motive, marketing activities by suppliers, firm business environment and information asymmetry. A descriptive survey was designed to collect a sample of 180 SMEs in Kariobangi Jua Kali Light Industries. The study was interested in determining the legal structure of the SMEs business, the duration they have been in operation, the volume of trade credit purchases and sales, the credit period granted to both suppliers and users of trade credit and finally determining the factors that influence trade credit use by SMEs . A questionnaire consisting of three sections was used. The first section sought demographic information of the sampled, while the second section sought information on access of trade credit by SMEs and third section elicited information on determinants of trade credit use. The research question addressed by the researcher was "what are the important factors influencing the use of trade credit by SMEs in Nairobi" The main findings of the study were that, the main business structure of the SMEs sampled was sole proprietorship, that most sales and purchases by SMEs are on credit, and that SMEs were granted longer credit period by their suppliers than they granted their customers. The study also indicated that the main determinants of trade credit use by SMEs are finance related considerations. The study also confirmed that trade credit is widely used by SMEs as a source of short term fund to cope with temporary cash flow problems.