CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The financing decision also known as the capital structure decision is possibly one of the most important decision by any firm (Dada and Ghazali, 2016). The decision affects the ability of the firm or organizations to survive in both the short and long run. As a continuous decision, financing affects the overall sustainability of an organization through its effect on a number of factors that contribute towards performance (Chadha and Sharma, 2015). In general, firm or organizations have different sizes with some being large, medium and small enterprises. According to Amah, Daminabo-Weje and Dosunmu (2013), Size is usually looked at from the quantitative dimension of the number of employees. One may also argue that other measures of magnitude such as the level of turnover, asset value as well as amount of profit generated can also be measures of size. Of all the different sizes of organizations, the small and medium enterprises have a unique position within the different countries. Small and medium enterprises have been observed over time to be the leading contributors towards all economies world over right from the developed to developing countries (Peter and Naicker, 2013; Ayyagari, Demirgüç- Kunt, and Maksimovic 2011: Ghimire and Abo 2013). 

In the Northwest region of Cameroon   just like a number of areas in other developing countries, most firms still find access to finance as one of the major challenge they face due to a number of factor including but not limited to inadequate collateral, information opaqueness, human resource capacity and affordability. The above factors are highly pronounced among the small and medium enterprises. The nature of these small and medium enterprises in terms of importance as well as their unique demands in terms of financing requires specific attention towards creating a financing model that will ensure that progress sustainably through their existence. 

Small and Medium Enterprises (SMEs) have been defined in different ways from one region and country to another. What can be noticed clearly is that most definitions base on factors such as number of employees, annual turnover and asset values (Kayanula & Quartey, 2000; Dalberg 2011). According to Ayyagari, Beck and Demirgüç-Kunt (2005), the World Bank defines SMEs as those enterprises having a maximum of 300 employees, generating a maximum of US$ 15 million as annual turnovers and having a maximum of US$ 15 million in value of assets. The(OECD) Organisation for Economic Co-operation and Development SME and Entrepreneurship Outlook 2005 defines SMEs as non-subsidiary, independent firms which employ fewer than a given number of employees varying across countries but the most frequent upper limit being 250 employees within the European Union. Different contexts especially by region provide different definitions based on the prevailing environment. 

Regardless of the lack of a standard way of defining small and medium enterprises, there is no debate when it comes to the contribution of these firms to the economy. SMEs world over are the engines of economic growth (Gujrati 2013) with substantial contribution towards employment, GDP contribution and Innovation. In so doing, SMEs just like other firms make use of different sources of finance in their broad categorizations. The broad categorization of sources of finance may follow; the basis of ownership, basis of source generation and basis of the term or duration. The basis ownership is where sources of finance are categorized as owner’s funds or borrowed funds which are also referred to as equity and debt. The basis source of generation is where sources of finance are categorized into internal and external sources. The basis of duration or term is where sources of finance are categorized as long and short term sources. 

Whatever the source of finance utilized by SMEs, clear understanding of the available different sources is critical, additionally, the unique features of these firms require that taking such a decision is affected by many factors especially the stage within the organizational life cycle. 

Life cycle of SMEs refers to a series of stages that an organization of a firm goes through from inception through growth, maturity to decline at the extreme end in the footsteps of a product life cycle (Wong & Ellis 2007). According to Karniouchina, Carson, Short and Ketchen Jr (2013), the life cycle is principally made up of growth, maturity and decline. A close analysis points to the fact that at the time when the business of a firm is growing, it can be taken to be in the growth stage. When the change in the business stagnates over a given period of time, the firm would be in the maturity stage while when business is consistently declining, the firm would be in the decline stage. In each of these stages of small and medium enterprises, a different mode of financing is required to meet-up with the changes in the firm. From the above mention statistics and features of the life cycle and mode of financing SMES, “The relationship between the life cycle and mode of financing SMEs in the north west region of Cameroon” will be our point of concern.

1.2 Statement of the Problem

Financing is a crucial factor to the success of any organisation and the financing decision is one of the key decisions in financial management (Stanley, Hirt & Bartley, 2014). According to Modigliani and Miller (1958) in Vuong (2014), with an appropriate mix of sources of finance, an organisation can maximise its value and hence secure financial sustainability. Different financing models such as Modigliani and Miller (M and M) with and without tax, trade off, pecking order and market timing theory have been developed to address the issue of financing organizations (Myers 2001). However, the models mainly focus on a generic organization and recommend a specific mix of debt and equity financing appropriate to that organization (Frielinghaus, Mostert & Firer, 2005). The reality is that organizations go through different stages in their life cycles right from start- up, growth, maturity and decline (Frielinghaus et al. 2005) with different financing requirements at each stage. At the start-up stage, organizations especially SMEs depend mainly on owner generated funding (Latifee 2005). As organizations grow, they attract debt financing and this remains the case at maturity (Cornell & Shapiro 1988).

A number of studies have been carried out on the lack of access to finance as a detriment to the performance of SMEs (Ganbold, 2008:6; Peter & Naicker 2013:18). Most of these studies have focused on access to borrowed funds (Berger & Udell 2006:2950; Beck, Demirgüç-Kunt & Maksimovic 2008:391) with a few taking care of access to equity funding (Stephanou & Rodriguez 2008:11). Among the studies, there has been little emphasis on financing along the life cycle of the SMEs and the stage that has had extensive focus is the growth stage as discussed by Langberg (2008). This has left a gap on the appropriate funding mechanisms that would make SMEs financially sustainable specifically along the life cycle. This is more prevalent among SMEs in developing countries such as Cameron and yet they form the backbone of such economies (Obanda 2011). According to Turyahikayo (2015) SMEs in Cameron face challenges such as Lack of collateral security, information opaqueness, inadequate technical skills, inadequate professionalism, competition from large firms and affordability as the main challenges when trying to access financing. It is for this reason that this study set out to further generate knowledge on the more appropriate funding mechanisms that can enable SMEs to survive and prosper through their various stages of the organizational life cycle.

Given the level of importance of SMEs across different economies especially in the developing world and the existing gap of knowledge on financing of SMEs along the organization’s life cycle, combined with the problem of finding an appropriate funding mechanism, it was found necessary to undertake this study on “the life cycle and mode of financing SMEs in the north west region of Cameroon”.

1.3 Research Questions

This research is proposed to answer the following research questions. These research questions are divided into main and specific research questions.

1.3.1 Main Research Question

The main research question includes:

What is the relationship between the life cycle and mode of financing SMEs in the North West Region of Cameroon?

1.3.2 Specific Research Questions

The following include the specific research questions:

• What is the relationship between the start-up stage and the mode of financing SMEs in the North West region of Cameron?
• What is the relationship between the growth stage of and the mode of financing SMEs in the North West region of Cameroon?
• What is the relationship between the maturity stage and the mode of financing SMEs in the North West region of Cameroon?
• What is the relationship between the declined stage and the mode of financing of SMEs in the North West region of Cameroon?

1.4 Objectives of the Study

The following objectives were formulated for the study. These objectives are divided into main and specific objectives.

1.4.1 Main Research Objective

The main research objective of this study includes:

To investigate the relationship between the life cycle and the mode of financing SMEs in the North West region of Cameroon.

1.4.2 Specific Research Objectives

In order to achieve the main objective, the following specific objectives are formulated for the study:

• To analyse the relationship between the start-up stage and the mode of financing SMEs in the North West region of Cameroon.
• To assess the relationship between the growth stage and the mode of financing SMEs in the North West region of Cameroon.
• To examine the relationship between the maturity stage and mode of financing SMEs in the North West region of Cameroon.
• To determine the relationship between the decline stage and the mode of financing of SMEs in the North West region of Cameroon.