Determinants of Capital Structure of Micro, Small and Medium Scale Entreprises in the Adentan Municipality, Accra, Ghana

Abstract

One of the most critical impediments MSMEs face is the access to finance. This is largely due to the problem of information asymmetry associated with MSMEs. Financing decision is a vital issue for every small business, as its absence often leads to bankruptcy and failure of the business. Extant literature suggests that business owners often finance their firms with different debt-equity ratios. A practical question could be asked as to what factors influence such financing decisions? This highlights the main objective of the study which was to examine the key determinants of Capital Structure of MSMEs within the Adentan Municipality. In this regard, primary data was collected from 150 entrepreneurs and business owners currently with operations within the Adentan Municipality. Findings of the study revealed that, profitability, interest rate of loan, tenure of loan, size of the firm, asset structure, age of the firm, and the type of product or service offered by the firm were all found to be relevant to their financing decision. Regression analysis was performed and the results revealed that, there is positive and significant relationship between the explanatory variables i.e. profitability, age and size of the firm and sources of finance i.e. retained earnings and debt. The researcher suggested that, entrepreneurs need to plough back to internally generated funds and also endeavor to use debt due to its tax benefits. This would enable the firm grow and increase its value. Also, business owners must endeavor to separate themselves from their business and keep proper records of all their business operations. Such records are very important during the process of accessing debt or external financing. Lastly, the researcher recommended that government should create a business friendly environment that would enable MSMEs thrive.