Effect of funding sources on the financial performance of SMEs. African Queen Uganda Limited

Abstract

The study focused on establishing the effect of funding sources on the financial performance of SMEs, a case study of African Queen Uganda Limited. The research objectives were to establish the effect of debt financing on the financial performance of SMEs, effect of equity financing on financial performance of SMEs and the effect of retained earnings on the financial performance of SMEs. The research design was case study adopting both quantitative and qualitative approaches. A structured questionnaire was used to collect data which was analysed using the Statistical Package for Social Scientists (SPSS). Both descriptive and inferential statistics were generated, presented and analysed to derive the relationships between the different variables. Results showed that there is a positive and significant effect (r = 0.542, p <0.01) between debt financing and financial performance of SMEs, a positive and significant effect (r = 0.518, p <0.01) between equity financing and financial performance and also a positive and significant effect (r = 0.554, p <0.01) between retained earnings and financial performance of SMEs. Based on these results the study concluded that sources of finance for SMEs have a positive and significant effect on the financial performance of SMEs. Key recommendations made by the study included; SMEs only going in for debt financing after making some profits and assets to act as security since debt repayment may involve loose of business ownership., SMEs should also go for equity financing after they have well evaluated the percentage they are willing to sell out to the investors in exchange for funds, and finally retained earnings should be accompanied by other funding sources since it is limited and excess ploughing of it back to the business may cause the business lose its profitability.