The relationship between alternative sources of finance and financial performance of small and medium enterprises in Nairobi county

Abstract

The contribution of Small and Medium-sized Enterprise (SME) sector in economic development, job creation and income generation has been recognized worldwide. However, these contributions are not effectively harnessed in Kenya. The main challenge limiting the sector to contribute fully is a shortage of finance. Moreover, corporate failure or success among firms companies in Kenya has often been associated with the financing model; formal source or alternative source of finance. This study therefore investigates the relationship between alternative source of finance and financial performance of SME in Nairobi County. The study employed descriptive research design. A stratified sampling method was used to collect primary data from eighty five SMEs in Nairobi County for the year 2013. The study applied regression and correlation statistical to tools to analyze data. The results were presented in tables, charts and frequency graphs. The study found out that the correlation between alternative source of finance and financial performance is 0.762. This is a strong positive relation between the variables which is consistent with studies done by Adenkule (2012) and Musyoka (2011). T-test found the relationship to be statistically significant of 8.46 at 99% confidence level. It also found out that high interest rates, collateral and guarantor requirement are the major hindrances to accessing alternative finance. The study therefore recommends use of alternative finance in SMEs in Nairobi since they will lower cost of finance and improve liquidity which will result in improved financial performance.