Financial Sources and Financial Performance of Youth Based Small and Medium Enterprises in Bungoma County, Kenya

Profitability, revenue growth, and cash flow improvements depended largely on how effectively firms managed and controlled their resources. The financial performance of Small and Medium Enterprises hinged on their ability to efficiently manage available finances. The main objective of this study was to investigate the influence of different sources of finance on the financial performance of youth-based SMEs in Bungoma County. Specifically, the study sought to determine the extent to which formal finance, personal financing, and government funds influenced the financial performance of youth-based SMEs in Bungoma County. The study adopted a descriptive research design and was anchored on the Pecking Order Theory, which was supported by the financial intermediation theory and Credit Rationing Theory. The target population comprised 765 SMEs registered with the Bungoma County Government Licensing Department for the year 2024. Using Yamane’s formula, a sample size of 263 respondents was selected through stratified random sampling. Data collection was conducted using structured questionnaires. A pilot study was carried out in Kakamega town, Kakamega County to test the reliability of the instruments, and expert opinions were sought to enhance validity. Data analysis was conducted using SPSS version 27, with findings presented in APA tables. Correlation and regression analyses were employed to examine the strength and significance of the relationships between financing sources and financial performance. The study’s findings revealed a strong positive correlation between formal financing and financial performance (B = 0.482; p=0.000) indicating that SMEs that accessed formal financial services recorded improved profitability and revenue growth. Personal financing also demonstrated a strong positive influence on financial performance (B =0.513, p= 0.000), suggesting that entrepreneurs’ personal funds contributed significantly to business success. Government funds were positively associated with financial performance (B =0.476, p= 0.000) although the correlation was somewhat weaker compared to other financing sources. Based on these findings, the study recommended that SME owners prioritize and establish a strong relationship with formal financial institutions to access affordable credit and financial services, while also effectively managing personal finances to complement formal funding. Academicians were encouraged to further explore the dynamics of financing and policy interactions in different SME contexts to enrich theoretical understanding and practical application. For the government, the study underscored the need to review and improve existing policies that affect SME financing, ensuring they foster an enabling environment that incentivizes financial institutions to support youth-based enterprises. Specifically, policies should focus on easing access to government funds and strengthening the regulatory framework to encourage transparency and accountability in financial service delivery.