Determinants of capital structure in Small and Medium Enterprises in Uganda : A case of Small and Medium Enterprises in Kampala Business District

Abstract

The purpose of the study was to examine the determinants of capital structure in SMEs in Uganda. The study used a quantitative descriptive research design to explore the determinants of capital structure of a sample of 75 companies in Uganda following a population of the top 100 medium sized companies as listed in Daily Monitor, 2018. The study revealed that majority of the respondents were male (74.67%) and the female respondents only made up 25.33%. Furthermore, majority of the respondents were finance managers (58.67%), followed by finance officers (40%) and the least were business information officers (1.33%). The results from the study also showed that majority of the SMEs from which data was collected have been in operation for over 10 years (81.33%) and the least have been in operation for a period of 4-10 years (18.67%). Findings of the study also show that majority of the companies that took part in the study are into construction, infrastructure and management consultancy (21.34%), followed by those in supply of agricultural inputs, chemicals, fertilizers and other agricultural inputs (9.33%). Furthermore, the least of the companies that took part in the study were into advertising and media services (1.33%), petroleum products, natural gas and lubricants (1.33%), financial, business and general consultancy services (1.33%), insurance brokerage and pension administration services (1.33%) and Fire services (1.33%). Lastly, majority of the companies that took part in the study have employees in the range of 20 to 50(52%), 37.33% of companies that took part in the study have employees in the range of 51 and above and 10.67% have employees in the range of 5 to 19. The study identified size of SME, age of SME, profitability, cost of capital and level of risk were the major capital structure determinants. The results from the study revealed that majority of the respondents chose retained earnings as the most preferred source of funding, followed by equity capital and debt capital is the least preferred source of funding. The results of the study show that respondents chose profitability as a very important factor in making financing decisions. Level of risk, effect on the cost of capital, age of the firm and size of the firm were also ranked as some of the important aspects that affect the financing decision of SMEs. The study identified high interest rates, inadequate collateral to secure loans, low level technical and management skills, lack of professionalism, competition and inability to afford long term financing as some of the challenges facing SMEs in acquiring capital.