The Determinants of Trade Credit in Small and Medium Sized Firms in Kenya

Ruth Wambui Kangethe, Aquilars M. Kalio

Abstract: Access to trade credit is hypothesized to be lower for Kenyan firms than for the developed countries. Despite the potential importance of trade credit, limited attention has been paid to its role and use, especially in developing countries. The main aim of the study was to find out the determinants of trade credit and moderating role age of the small and medium sized firms in Nakuru sub-county. The study was informed by Financial Motives and Commercial Motives models. This study adopted a descriptive survey. The population of study comprised of 6624 registered SMEs in Nakuru town. Simple random sampling was used to select a sample size of 197 SMEs. Documentary guide was used to collect secondary data. Descriptive statistics was used to test for normality of the data collected. Measures of central tendency were computed. Inferential statistics was used to draw implications from the data with regard to the regression model. Correlation analysis was utilized to test the hypothesis of the study. The study findings indicated that profitability, collateral, liquidity and inventory have a positive and significant effect on SME trade credit. The study concluded that SME, s need to establish a well-defined trade credit granting criteria so as to assess the creditworthiness of the buyers. Firms should be cautious while pledging an asset as collateral and should hold liquid assets to enable them meet their financial obligation.

Keywords: Trade Credit, Profitability, Collateral, Liquidity, Inventory