The effect of short-term bank loan financing on financial performance of manufacturing Small and Medium Enterprises (SMEs) in Rwanda

By Byombi Kamasa Vedaste & Dr. Charles Ruranga

Short-term loan financing is one of ways used to fasten financial performance and growth of firms mainly those operating in manufacturing domain. It is an important source of finance to small and medium enterprises (SMEs) all over the World where it has financed almost half of the businesses done by SMEs in United States of America (USA), many businesses are financed by short-term loan European countries, Africa and Asia. Despite its importance all over the world, short-term loan financing in terms of line of credit and overdraft facilities have not been given much attentions in different literatures all over the World and mainly in Rwandan context. Being a great source of finance to SMEs, there is no clear indication about the level at which it contributes to the financial performance and growth of SMEs. At policy level there are not much rules, laws, regulations and guidelines about short term loan financing in Rwanda. Based on a population of 382 manufacturing SMEs operating in Kigali, a sample of 196 SMEs was drawn and a survey study was conducted using self-administered questionnaires to collect primary data from SME holders. The research was guided by the pecking order theory, which set an order of preferences between sources of finance. Descriptive and inferential statistics were used to analyze collected data. Using a binary logistic model the findings revealed that there is significant and positive relationship between short term loan financing in terms of line of credit finance, overdraft financing facilities, contract finance, working experience and organization types financial performance of manufacturing SMEs in terms profit. In summary short term, loan financing is a powerful tool to finance manufacturing firms and it must inform policy makers in Rwanda to think about ways of empowering SMEs owners with financial literacy.

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