Effect of trade credit on financial performance of small scale enterprises

Abstract

This paper describes the relationship between trade credit and SME financial performance for a sample of 50 audited Kenyan Small and Medium Enterprise firms. It discusses on how trade credit affects three measures of financial performance namely; liquidity, profit margin and return on assets. Documentary guide was used in the study to collect secondary data and the data collected were keyed and coded into SPSS package version 20. Analysis was conducted using both inferential and descriptive statistics specifically mean and standard deviation. Inferential statistics where Pearson correlation coefficient to determine the degree of relationship while Multiple regression model was used to test the hypotheses. Findings indicated that trade credit positively affected liquidity, profit margin and return on assets. The results appear to be consistent with pecking order theory by SMEs in pattern of using trade credit instead of other external source of finance