Most Kenyan businesses are classified as small to medium enterprises and are either sole proprietorships, partnerships or companies.
Research has shown that most small businesses close down after five years of opening.
Some of the reasons for this include lack of management expertise, competition in the marketplace and financial challenges.
Most businesses can identify financial difficulty as the most pressing challenge.
Financing needs
When faced with financing needs, most businesses opt for a bank loan or other form of debt capital as these are easily accessible.
Another feature of debt capital that seems attractive to businesses is that there is no loss of control of management as the lender is rarely involved in the day to day operations of the enterprise.
A firm facing financial stress will rush to a financier and get a loan to meet its capital requirements.
But a few years down the line, the firm may face liquidity challenges especially if the cash in flow is less than the loan repayment.
The financier will then exercise his statutory rights and either sell off the company's assets or place it under receivership to recover the money owed.
This is the unfortunate cycle for most Kenyan businesses.
Equity capital seems to be a good alternative for firms wishing to raise capital.
Not only is equity capital cheaper than debt capital in the long run but it is also a very good way to raise large amounts of capital.
The amount that can be raised through debt is limited as one can only borrow so much.
Equity capital is the safest and easiest way to raise funds for expansion or projects.
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