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The objective of this study was to examine the effects of sources of finance on the performance of three small and medium size companies in Mendong-Yaounde. Descriptive cross sectional research design was adopted for this study. The target population for this study was the 30 SMEs (2023) in Mendong-Yaounde. Simple random sampling was used to select the 30 companies. The sample size was therefore 30 SMEs. Primary data was collected through the use of questionnaires which were designed based on the study objective.  Data was entered into SPSS and analyzed using inferential statistics and regression analysis. The descriptive results showed that 77% of the firms had used personal income as a source of financing, 60% used bank loans, 57% used venture capital, 40% used leasing, 43% used sale of shares, 7% used government loans, and 13% used microfinance. All these sources were used by most firms to a low extent as financing options. The regression results show that personal income, bank loans, microfinance, and government loans had weak positive effects while venture capital, leasing, and sale of shares had weak negative effects on the financial performance of Small and Medium size enterprises in Mendong-Yaounde at 5% level of significance. The study concludes that the sources of finance do not affect the financial performance of Small and Medium size enterprises in Mendong-Yaounde. The study recommends the need for use of a mix of financing options to improve the financial performance of organizations rather than reliance on one form of financing. The study also recommends that the Government should be instrumental in offering loan facilities for businesses as currently very few SMES firms have used this method of financing.

Key words: SMEs, sources of finance, financial performance


1.1     Background of the Study

Small and Medium Sizes Enterprises (SMEs) play an important role in most of the world’s economies. Generally, they are vectors of job and wealth creation. Through their investments and consumption, they create goods and services and serve as tools for wealth redistribution.

  The availability of finance has been highlighted as a major factor in the development, growth and successfulness of SMEs (Ou & Haynes, 2006; Cook, 2001). According to Saravanan et al (2008) SMEs comprise over 90 percent of African business operations and contribute to over 50 percent of African employment and GDP. Financing methods employed by SMEs vary from initial internal sources, such as owner– manager’s personal savings and retained profits (Wu,Song, & Zeng, 2008) to informal outside sources, including financial assistance from family and friends (Abouzeedan,2003),  trade credit,  venture  capital  and  angel  financiers  (He  & baker,  2007),  and thence  to  formal  external  sources  represented  by financial  intermediaries  such  as banks, financial institutions and securities markets (Chittenden, Hall, & Hutchinson,199).

SMEs  are  very  significant  to  the  economic  success  for  most  countries  and  their citizens and in recent times have been observed to employ an increasing proportion of the workforce of most countries. Though SMEs are making positive contributions to economic growth and development in Cameroon, the rate of failure is high. According to (RGE2,2016) the SME sector employs about 54% of the Cameroon workforce. Despite this significance, past statistics indicates that three out of every five businesses fail within the first few years of operation (CAMERCAP-PARC, 2016)

The national institution of statistics, Cameroon (2015) showed that over75% of newly created SMES in Cameroon did not survive beyond three years. Also according to a survey by NIS(2019), the survival rate of SMEs in the South West Regionis 20.5% which indicates that about 80% of SMEs in this region do not survive beyond three years. Therefore the general problem facing small and medium business owners in Cameroon is that they are not able to sustain their businesses beyond five years despite measures put by the government like the creation of the Authorized Management Centers (AMCs) for supervising enterprise management and training, the Small and Medium -Sized Enterprise Promoting Agency(APME) responsible for improving the competitiveness of SMEs through the provision of consultancy and support services like providing tax advice, the Cameroonian Bank for  Small and Medium -Sized Enterprise (BC-PME) whose primordial mission is to fund SMEs. This fact raises concern about their financial performance.

According to the report presented by doing business (2019), Cameroon’s business climate is risky as it is ranked in the 166th position out of 190 countries involved in the study.

It is expected that by the year 2035, Cameroon would have transformed to into a newly industrialized nation and SMEs are seen as a key element in the country’s 2010 Poverty Reduction and Strategy Paper (PRSP) (monetary fund 2010).

 There is a fast growth in the number of privately owned small and medium-sized companies worldwide; however, this category of business is plagued by several issues that deter this growth. A key challenge for most SMEs is the problems of financing, according to Da Silva et al. (2007), all small firms live under tight liquidity constraints, therefore making finance a major problem for them.

According to Ogujiuba et al. (2004) generating an entrepreneurial idea is one thing but accessing the necessary finance to translate such ideas into reality is another. Many novel entrepreneurial ideas have been known to die simply because their originators could not fund them, and banks could not be convinced that they were worth investing in. Finance, whether owned or borrowed, is needed to expand so as to maximize profit and given the nature of SMES, there is a need for financing.

1.2     Research Problem

Firms  depend  on  a  variety  of  sourcing  of  financing  both  internal  and  external (Terungwa,   2012).  The relationship among these sources and their effects on investment; however remain unclear in the literature. In the cases of SMEs, bank loan and credit is a major alternative of external funding.  According to Valverde  et al. (2005) bank credit play a crucial role in providing external financing to SMEs. But in African context, this crucial source of finance for SMEs is apparently non-functional (Kadri, 2012).

       SMEs currently contribute only 36% of Cameroon’s GDP, though they have a potential to contribute more. This contribution highlights the co-existence of key hindrances such as payment of taxes, difficulties to access financing, administrative bottlenecks/ bureaucracy, insufficient infrastructures, corruption, insufficient technical assistance, etc. However, Cameroon is a good example for assessing the performance of SMEs in Sub-Saharan Africa because Cameroon is the biggest economy in the CEMAC Zone, and its structure is similar to that of most Sub-Saharan Africa countries

The biggest problem to the growth of SMEs has been financing as commercial banks shy away from financing them.  The  key issue  affecting  the  SMEs  can be  group  into  four: unfriendly business  environment,  poor funding, low management  skill and lack of access to technology (Onoivosa, 2013).Among these, shortage of finance occupies a central position. Globally commercial banks which remain the biggest source of funds to SMEs have in most cases shied away because of perceived risks and uncertainties.

Studies on the effect of financing sources on performance of SMEs are limited. For instance, Memba, Gakure, & Karanja (2012) and Gikomo (2013) examined the impact of venture capital on growth of SMEs while Ondieki et al. (2013) studied the effect of external financing on performance of SMEs. Another study by Mbugua (2010) examined the impact of microfinance services on financial performance of SMEs have in most cases shied away because of perceived risks and uncertainties.

 There  is  therefore  a  gap  as  concerns  study  on  how  source  of financing  affects financial performance  of  SMEs  in Mendong – Yaounde.  

The present study attempts to address this gap by answering the following research question.

1.3     Research questions

  1. What are the effects of personal income on financial performance of SMEs in Mendong-Yaounde?
  2. What are the effects of bank loan on financial performance of SMEs in Mendong- Yaounde?
  • What is the effects venture capital on financial performance of SMEs in Mendong-Yaounde?
  1. What are the effects of government loans on financial performance of SMEs in Mendong-Yaounde?
  2. What are the effects of leasing and sales of shares on financial performance of SMEs in Mendong-Yaounde?
  3. What is the effect of microfinance on financial performance of SMEs in Mendong-Yaounde?
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