The Relationship Between Capital Financing And Growth Of Small And Medium Enterprises In The Agribusiness Sector

Abstract

Owing to the problems associated with accessing alternative credit facilities, a large proportion of Kenyan agribusiness SMEs rely more on self-financing in terms of retained earnings. The implication, therefore, is that SMEs do not have adequate credit to meet the needs at different levels of growth. The objective of the study was to assess the nature of relationship between capital financing and growth of SMEs in the agribusiness sector in Kenya. The population of this study comprised of 138 SMEs currently engaging in agribusiness activities, specifically in the horticulture, dairy, and poultry products sub-sectors. Sampling was performed in two stages. In the first stage, purposive sampling technique was applied to select specific firms that had been continuously operating for the five year period 2008 – 2012. In the second stage, a representative sample of firms was drawn from each of the sub-sectors through probability sampling techniques. Simple random sampling was used to select 30% of firms dealing in production and export of fruits and vegetables while a sample proportion of 50% was applied each for the flowers Fresh Flowers Growers & Exporters and the Dairy, Poultry Producers and Processors sub-sectors. The study applied data from secondary sources. The data for the companies was extracted from the annual reports and financial statements for the five-year period 2008-2012. These were obtained from the administrative and finance departments of the respective companies. The data was collected using a structured data observation sheet. A multiple regression model was used to establish the relationship between capital financing option and firm-level growth indicators. A response rate of 79.2% was achieved. The findings showed that there is a positive correlation between the growth of agribusiness SME and choice of capital financing option. The findings showed that external capital financing options are key drivers of growth for the sampled agribusiness SMEs. The five growth attributes namely: the number of employees at the end of the year; number of strategic business units (branches); profit before taxation; total asset base; and total turnover; were all found to have a significant positive correlation to the choice of external capital financing index. The findings further showed that the combined effect of internal and external capital financing options has significant impact on growth in profitability and total turnover. The study recommends ways to enhance factor finance and government assistance as ways of support SMEs to raise capital.