The impact of Debt Financing on Performance of Small and Medium Enterprises in Ghana

Abstract

Small and Medium Enterprises (SMEs) are an essential part in the growth of the economy and industry as a whole. But in the long run, capital is needed to boost their performance hence the need to finance their operations primarily through debt. The scare research on debt financing of SMEs leads to the purpose of this study to analyze the impact of debt financing on SMEs performance in Ghana. The SMEs sample used for the analysis was taken from Ghana Stock Exchange (GSE) database, which has forty-two (42) companies listed. It contains a comprehensive array of financial statements and balance sheets for companies active in Ghana. For the purpose of the study, 8 SMEs were selected based on their stated capital of not less than GHC 300,000. A five-year time frame financial account reports from 2015 -2019 consecutive year period were used for this study. Also, the study hypothesis was tested using multiple regression analysis. From the results of the study, debt-financed through both short and long term have a detrimental impact on SMEs' financial performance. With the intention to destitute credit and loan control policies, the study recommends that SMEs utilize their debt significantly. The diversification of their revenue streams, is essential to amateur down payment modes for trade credits and practice proper financial bookkeeping records. It is also suggested that transparency in payment schedules and necessity of training their employees on a regular basis.

Effect of Bank Loan Financing on Financial Performance of Smes in Mombasa County, Kenya

“…However, the results were variant from studies found by Ophelia et al (2021) in Ghana, who found a negative impact on financial performance. The SMEs seek good sources of bank loans in terms of interest and repayment period, hoping that the business is profitable to service the loans.…”

“…Since SMEs size does not play a moderating role, policymakers, banks, and owner-managers should refrain from formulating a size-specific policy and strategy if enterprises fall under the SME category. Ophelia et al (2021) Sought to establish the impact of debt financing on the performance of Small and Medium Enterprises in Ghana. The results of the study show that debt-financed loans, both long and short-term, have a negative impact on financial performance.…”

“…The methodology used was panel least square and adopted the Hausman test to select the fixed effect or the random effect modelThe study results indicated that debt financing negatively and significantly impacts firm performance in Pakistan. (Ophelia et al, 2021), studied the impact of debt financing on the performance of SMEs in Ghana. The study's objectives were to define the effect of short-term loans on SMEs' performance and deter long-term loans on SMEs' performance.…”

Research on The Effect of Cost of Debt on The Financial Performance of Companies In The Borsa İstanbul Manufacturing Sector

“…As a result of the literature review, studies examining the effect of capital structure on financial performance are " ; ; Çanakçıoğlu and Ersan (2020); Özdemir (2019); Le and Phan (2017); Akpinar (2016); ; ; ; ; ; Nirajini and Priya (2013); ; Salim and Yadav (2012); ; ; ; ; "; studies examining the effect of debt financing on financial performance are " Ophelia et al (2021); ; ; ; Muchugia (2013); Obert and Olawale (2010)"; studies examining the effect of debt structure on asset profitability are " Baraklı and Öndeş (2021); Say and Doğan (2022); " has been examined extensively in national and international literature. Additionally, in the study conducted by "Chen (2012)" in the literature, the relationship between board structure, cost of debt and firm performance was examined; in the study conducted by ", the relationship between government subsidies, cost of debt and firm performance was examined, and in the study conducted by "Özer, Çam and Cookie (2023)", the relationship between corporate governance and cost of debt was examined.…”

“…As a result of evaluating the literature as a whole, it was determined that regression analysis was used in the studies. Some of the studies examining the effect of capital structure, debt financing and debt structure on financial performance include positive results that are " Baraklı and Öndeş (2021); ; ; Muchugia (2013); Nirajini and Priya (2013); " and some studies including " Say and Doğan (2022); ; Ngoc,Tien and Thu (2021); Ophelia et al (2021); Çanakçıoğlu and Ersan (2020); Özdemir (2019); ; Le and Phan (2017); ; ; ; ; Salim and Yadav (2012); " were obtained negative results. In some studies, " ; Obert and Olawale (2010) it was found that capital structure; debt financing and debt structure do not have a significant effect on financial performance.…”