Effect of demand-side factors on access to external finance by micro, small and medium manufacturing enterprises in Kumasi metropolis, Ghana

The aim of this study was to analyze how demand-side factors affect access to external finance by micro, small and medium manufacturing enterprises (MSMMEs) in the Kumasi Metropolis, Ghana. The demand-side factors that were used in the study were firm characteristics (age, size, legal form and asset tangibility), financial management practices (preparation and usage of financial information, business plan, capital budgeting and working capital management) and entrepreneur characteristics (age, gender, education and experience). The study was conducted among MSMMEs in the Kumasi Metropolis, in the Ashanti Region of Ghana. The target population of the study was 4400 MSMMEs. The sample size of the study was 440 MSMMEs made up of 248 micro firms, 137 small firms and 55 medium enterprises. This study employed explanatory survey design utilizing quantitative methods in data collection and analysis. Data was analyzed using descriptive statistics such as means and frequency distribution. Pearson‘s correlation was used to test the relationship between firm characteristics and financial structure. Logistic regression was also used to test the relationship between demand-side factors and access to external finance. Logistic regression was used because of the dichotomous nature of the dependent variable, as firms are grouped as having access or no access to external finance. The results of the study show that there is a positive relationship between financial structure and firm characteristics (age, size, legal form and asset tangibility). The study found that some of the demand-side factors analyzed impacted significantly on access to external finance. These include size of the firm, educational background and work experience of the entrepreneur and financial management practices such as preparation and use of financial information, business plan and capital budgeting. It is recommended that firms should incorporate good financial management practices such as preparation and usage of financial information in their operations. It is also important for entrepreneurs to incorporate business plans in their operations as this impact positively on access to external finance. Education and experience of the entrepreneur were found to significantly impact on access to external finance. There is therefore the need to design short courses in the area of financial management practices for entrepreneurs, particularly those with lower educational background as education is an important factor in accessing external finance. Size of the firm was also found to be a significant factor affecting access to external finance and therefore small firms should come together to form bigger firms in order to attract external finance. Ghana government should be directly involved to help eliminate the financing gap faced by MSMMEs through direct government interventions through public banks, credit guarantee schemes and other forms of subsidized financing. The procedures involved in seeking external finance should be simplified to encourage more MSMMEs to seek external finance. Banks and other financial providers should have a department solely devoted to the financing needs of MSMMEs and develop products purposely for MSMMEs.