The Effects of debt finance on performance of small to medium enterprises on Mutoko area.

Abstract

This study examined the effects of debt financing on the performance of small and medium enterprises (SMEs) in Mutoko, Mashonaland East Province, Zimbabwe. The research objectives were to examine the relationship between debt financing and SME business performance, to assess the challenges faced by SMEs in accessing and managing debt finance, and to evaluate strategies that can improve the effective use of debt finance among SMEs in Mutoko. These objectives were grounded in three theoretical frameworks: Jensen and Meckling's Agency Cost Theory, Modigliani and Miller's Trade-Off Theory, and Myers and Majluf's Pecking Order Theory. A positivist research philosophy and quantitative approach were adopted, with a descriptive correlational research design. The study population comprised 120 registered SMEs and financial institution offices in Mutoko, from which a sample of 86 respondents was obtained using stratified random sampling, yielding a response rate of 76.8%. Data were collected through structured questionnaires and analyzed using descriptive statistics and Pearson's correlation analysis in SPSS version 25. Findings revealed a significant positive relationship between debt financing and the profitability–cash flow nexus (r = .392, p < .001), while a significant negative relationship was found between debt-induced cash flow pressure and business growth (r = –.300, p = .005). The study concludes that debt financing has a nuanced and context-dependent effect on SME performance in Mutoko's high-interest-rate economic environment. It recommends that financial institutions introduce flexible repayment structures and alternative collateral assessment mechanisms, that policymakers reduce benchmark lending rates and invest in financial literacy programs at the community level, and that SME owners strengthen financial record-keeping and adopt disciplined borrowing practices to improve sustainable business performance.