THE IMPACT OF DEBT FINANCING ON PRODUCTIVITY OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs): A CASE STUDY OF SMEs IN MASVINGO URBAN

Small and medium scale enterprises are considered important in both developed and developing countries. They are produce goods and services which help to increase economic growth and contribute significantly to employment creation. Although they play a crucial role in economic growth and employment their operations are often crippled by lack of adequate financing from financial institutions. The main purpose of this research was to investigate the impact of debt financing on the operations of SMEs in Masvingo. Both qualitative and quantitative research designs were used in the study. The study used a sample of 80 SMEs. Primary data was collected by means of a survey. Secondary data from SMEs records was used in the study. The data was analysed using SPSS 19. The results from the study showed that debt finance had a positive impact on productivity of SMEs. The study also established that firms which received adequate funding from banks improved their productivity. Another finding of the study was that the cost of borrowing was too high to enable firms to borrow adequate amount of required finance investment. The study concluded that a reasonable level of debt in the capital structure of the SMEs helped to improve their productivity. The study recommends that financial institutions offer long-term debt to SMEs to enable them to invest in capital equipment to increase productivity in future. The study also recommends the lowering of interest rates to motivate SMEs acquire enough funds to invest in capital equipment. Copyright © IJEBF, all rights reserved.