Abstract:
The study was to investigate the effects of capital structure on the financial performance of SMEs
in Narok Town. The target population was 48 small business where 31 responded. The study
sought to assess the effects of the use of equity as a source of finance on the financial performance
of SMEs, assess the effect the use of debt as a source of finance on the financial performance of
SMEs and investigate the challenges being faces by SMEs. The study adopted the pecking order
theory and trade off theory. Stratified random sampling was utilized in selecting the respondents
for the study. Primary data was collected from the study respondents using questionnaires. Data
was analyzed descriptively and presented through figures, tables, percentages and tabulation to
show differences in frequencies. The study found out that most SMEs finance their capital through
the use of both equity and internal sources. Capital structure has a significant effect on both
profitability and sales growth of the SMEs.
