Abstract

Fatoki Olawale Olufunso*, George Herbst and Mornay Roberts-Lombard

This study investigated the impact of the usage of debt on the profitability of small and medium enterprises (SMEs) in the manufacturing sector in the Buffalo City Municipality of the Eastern Cape Province of South Africa. To achieve this objective, the research hypothesized that the usage of debt has a negative impact on the profitability of SMEs. The research further hypothesized that SMEs have a difficulty in accessing debt finance from commercial banks. The study is important because SMEs, despite their contributions to the South African economy, have not been given due attention as research on corporate finance has been biased towards large firms. The results indicated that the usage of debt has a significantly negative impact on the profitability of SMEs. The results also indicated that SMEs have difficulties accessing debt from commercial banks. Lastly, the study recommended some measures that are expected to improve the accessibility to debt and reduce the cost of debt to SMEs. These measures among others include reduction in interest rates, awareness programmes by the banks, more bank competition (specifically commercial banks that are focused on lending to SMEs) and training of the owners of SMEs in the areas of writing business plans.