INTERNATIONAL JOURNAL OF ACADEMICS & …...value (Muritala T. , 2018). According to Zhu (2014)...

INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/2.1article23

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250 IJARKE PEER REVIEWED JOURNAL Vol. 2, Issue 1 Aug. – Oct. 2019

Effects of Capital Structure on Access to Financing Options – A Case

Study of Tour Firms in Mombasa County

Stephen Nthenge Muli, Jomo Kenyatta University of Agriculture & Technology, Kenya

Dr. Moses Wekesa, Jomo Kenyatta University of Agriculture & Technology, Kenya

1. Introduction

In measuring a country’s overall growth of the economy and development, the firms’ growth is of important consideration.

Finance in any firm forms an immediate factor that is generally a factor directly responsible for the overall growth or failure of

businesses in countries that are still developing. For such firms to achieve considerable growth over time, they need to be able to

adequately finance their operations such that they are able to effectively offer employment, create incomes in terms of profits,

generate enough profits distributable to shareholders as dividends, and pay wages to the workers. As such, the capital structure

serves to play an important role element in a firms financing process or simply put in the accessing of financing options to the

firms (United Nations, 2017). Generally, and in reality, the structure of capital of a business concern can be said to comprise a mix

of assorted securities and that firms have with them an option of many available alternative capital structures. The companies can

issue a relatively large amount of debt or a very little amount of debt or can also opt to issue diverse securities in different

combinations. Alternatively, a firm could decide to either to organize to finance operations by way of lease financing, sign

forward/future contracts, issue transformable bonds, and trade on swaps or even better use warrants. All these have to be seen

being geared towards having the firm attempting to find that particular combination that best maximizes the firms overall market

value (Muritala T. , 2018).

According to Zhu (2014) capital structure talks about the company’s outstanding debt and equity which eventually permits an

enterprise to understand the kind of funding the company adopts in an attempt to funding its general undertakings and for growth.

INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH (IJARKE Business & Management Journal)

Abstract

Capital Structure has in itself closely interrelated variables used for decision making that render it to be one of the difficult

areas of decision making in finance. Firms that desire to run effectively and efficiently must make important capital structure

decisions. These decisions have an influence on the firms’ capability to productively operate within the confines of a

completely competitive environment and form a vital factor in measuring the firm’s return maximization. The main purpose of

this research was to examine and explore the effects of capital structure on the access to financing options for tour firms in

Mombasa County. Four theories namely; the M&M capital structure relevance theory, trade-off theory of capital structure,

pecking order theory, and signaling theory grounded the study. Generally, the objective of the research sought to establish

whether or not there is an effect of capital structure on access to financing option for tour firms. The research also specifically

sought to establish the effect of the short-term debt, long term debt, share capital, and reserve capital on the access to

financing options for tour firms. Tourism has globally, regionally and locally gained interest and has reported continued

growth and diversification and is becoming one of the fast-growing sectors of the economy world over. ‎ wq uoa‎awsm mso‎uo‎

htwoots‎ uapo otmpo ‎ supc‎ orotwtaoap‎ ma ‎ uahtq oo‎ m‎ i wsuai‎ aqaso ‎‎ of first-hand destinations. The target population of

interest to the research was tour firms functioning in Mombasa County and a census of all registered tour firms in Mombasa

County operating under the umbrella of KATO (Kenya Association of Tour Operators) were used as sample for the study. An

explanatory non-experimental research design was adopted in the study where secondary data was obtained from financial

reports of sampled tour firms and primary data was gathered using questionnaires. Data gathered during the research was

tabulated and analyzed using both descriptive and inferential statistics while being aided by the Statistical Program for Social

Science (SPSS) to test the hypothesis. Descriptive statistics involved using weighted averages and percentages while

inferential statistics involved the use of ANOVA and regression analysis. The study therefore concludes that short-term debt

and share capital has a significant effect on access to financing options of tour firms in Mombasa County. The study also

concluded that long-term debt and reserve capital have no significant effect on access to financing options of tour firms in

Mombasa County. The study recommends the following: That tour firms should negotiate for long-term debts with financiers

as this helps the firm to plan for its liquidity; That tour firms should keep a margin of its profitability in reserves for future

financing since it is a cheaper way of financing; That tour firms should consider listing on the securities exchange and that

tour firms should consider mergers amongst tours and travel sector to build on synergy and create competitive advantage.

Key words: Capital Structure, Access to Finance, Debt Financing, Tour Firms


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Technically defined, by the study, capital structure is perceived as a firms’ cautious balance between equity and debt in the

sponsoring acquisition of its assets, daily operating processes, and yet to come development. It was further observed from the

study that, from a strategic perspective, capital structure tends to influence everything starting from the firm’s risk outline, ease to

secure funding, and the cost involved in such financing, what the investor expect as their returns, and its level of protection from

both micro and macro-economic downtowns that affect the firm.

A global evaluation of company’s capital structure gives an overview of the level of the company’s risk exposures as it

attempts to fund its operations. According to Joshua and Amir (2010) disregarding debt heterogeneity will lead to having an

oversight on the variation of capital structure. Moreover, according to Rauh and Sufi (2010) in assessing firms in comparison to

their credit quality, those with low quality credit often depict a multi-tiered structure of capital comprising of bank debts that are

secured replicating tight agreements and secondary loose agreements non-bank debts. Debt instruments owners hold their claims

to the debt as the principal cash they owe and the relative interest that come together with the payments whereas equity owners

basically hold their entitlements as their right of access to an assured future company’s percentage of earnings in terms of profits

(Stout, 2016).

According to a study by Lemmon and Zender, (2010) firms tend to choose internal funds as a financing source for all firms

and that in the event that external funds are to be needed especially in the event that the firm have a debt capacity distresses, debt

will be preferable over equity. The anxiety associated with a firm’s capacity to handle debt fundamentally expounds on why

publicly traded companies embrace the use of newly issued external finance equity. The study also evidenced that profitable firms

with a low leverage and with reduced transactional costs associated with issuing of new securities will tend to have a stockpile

debt capacity. A study on ownership structure by Paligorova and Xu, (2012) revealed that, Pyramids, with a subsidiary and one

dominantly governing shareholder will be more dependent on debt financing than non-pyramid firms and that a slightly greater

leverage will be witnessed in those pyramids where the second governing shareholders have further balloting rights. The study

also found out that the difference between the rights to ballot of the first two governing shareholders is adversely related to the

leverage of the firm but of interest is that, the effect of the second governing shareholder only exists in non-family run and

controlled pyramids.

From a study of listed Bangladesh firms by Sayeed (2011) agency cost was seen to inversely touch on the total debt ratio of

firms and that the rate of tax had an increasing influence only on protracted debts and on non-debt tax safeguards for instance

depreciation have a undesirable impact on overall debt proportion. Costs on profitability and bankruptcy were seen to be

immaterial in influencing leverage ratios, whereas the firm’s size had an affirmative impact in determining total debt and total

long term debt ratios.

A study by Oladeji, Ikpefan, and Olokoyo (2015) revealed that a negative relationship exists between leverage of a firm and its

performance and further established that there subsists a positive connection between the company’s size, tax and trailed yield of

asset as viewed in comparison to the performance of the firm. On the other hand, Anarfo (2015) postulated that capital structure

has no influence on the performance of banks but rather that the banks’ capital structure is determined by its performance. The

study results by Barnor & Odonkor (2013) revealed that there is a statistical insignificance of capital structure in African banks

thereby implying that the banks performance is not impacted by the capital structure but rather it is capital structure that depends

on banks’ the overall performance.

The tangibility of firms’ assets is a driving element towards capital structure as firms having more physical assets will less

likely suffer from financial constrains according to (Muritala T. A., 2012). The research findings evidenced that there is a

significantly negative relationship existing between the tangibility of an assets as viewed against the assets’ return being a

measure of performance. This implied that the entities sampled were unable to effectively utilize their fixed assets composition on

their total assets prudently to deliver a positive influence on the firms’ performance.

1.1 Access to Financing Options

In general, companies are able to finance their operations and acquisition of assets partly through their own equity assets

viewed as own capital (ordinary, preference and retained earnings) and partly by other sources such as long term debts/liabilities

that may consist of (bonds, bank loans and other loans) and also from short term debts/liabilities consisting of (trade payable,

accruals, and bank overdrafts facilities) (Morley, 2013).

Business entities can opt to finance operations by means of a combination of both equity and debt in their structure of capital

in a certain ratio in order to benefit from the pooled debt and equity while the cash flows produced is appropriated amongst the

equity and debt providers (Turner, 2017). This according to James (2014) is however likely to water down equity proprietorship

and could lead to the commencement of agency conflicts amongst the equity proprietors and debt suppliers.

Financing options for the firm will range from startup capital, asset financing, lease financing and growth financing. The first

few years are usually the most uncertain for both small and large business firms who without an established credit they often find

it difficult to get working capital making it hard for the firms to finance its inventory or staff and other obligations since even the

established entrepreneur will find it difficult finding a lender who will take a chance on funding the firm (QuickBooks Intuit,


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2019). Such funding is needed or is essential for small business establishments in financing their growth and resolving their cash

flow gap.

An examination of previous studies and researches conducted and as discussed in the literature revealed that capital structure

indeed impacts a company’s performance but sparingly goes to point out on the access to the firms financing options. In his study

Mwangi (2016) points out that the capital structure engaged by companies impact their financial performance tendencies whose

empirical determination and exploration using tour firms in Mombasa County constituted the general objective of this study which

was to find out the association between the capital structure and access to financing options of the tour firms.

1.2 The Tourism Industry in Kenya

Over the years, the tourism industry has experienced sustained growth and expanding ‎divergence and is now counted as being

amongst the fastest developing segments of the economy the world over. co‎ tourism industry today is closely associated with

economic growth and incorporates a rising figure ‎of new final destinations. According to Word Tourism Organization (2018),

these forces at work have transformed tourism into a vital growth factor for the overall development of social economy. Today,

the business volumes associated with tourism equals or even surpass that of oil, food, or even that of automobiles products. In the

perspective of international commerce, tourism has now come out to amongst the major players and also represents a major

income generator for many of the emerging economies of the world or developing economies. This development goes alongside

with a ‎growing divergence and rivalry among the various destinations (Chambers, 2014).

Today, tourism is viewed as an engine of growth in the modern-day economy and is perceived to be one of the globally

leading industries. Apart from being a purely labor-intensive business, it has the ability to motivate an upsurge in export incomes

in a business setting that in general is seen to experience a high predictability as opposed to the export and commodity market that

is seen to be generally unpredictable in nature (Dwyer, Pham, Jago, Bailey, & Marshall, 2016). An indication by WTTC is that

travel and tourism in South Africa employs more people directly than other commercial segments and as per statistical report by

Brand South Africa (2018) it ‎cmo‎oqttw po ‎aw o‎pcma‎ sb‎auttuwa‎mwso‎ua‎pwpmt‎ma ‎up‎ u ohpts sustained 702,824 jobs in 2015 and

as per forecasts, by the year 2026, the number of direct jobs anticipated to be generated will range from 1 million and slightly over

2.26 million employments in total will be supported by the segment.

Tanzania was obligated to appraise its 1999 tourism policy so as to charm more private concerns to invest in tourism,

particularly in the southern part of the country which is adorned with an abundance of historical sites, beaches, wildlife, and

geological features according to (Tairo, 2018). The article further puts it out that the segment was initially mostly dependent on

wildlife, but a proposal by the private sector in collaboration with the government is to expand so as to include meeting and

conference tourism in order to ensure that tourists and visitors are also shifted to the southern and Lake Victoria circuit zones.

In Kenya tourism and travel in 2016 contributed to the GDP an amount of KSH257.4bn (3.7% of GDP). This was anticipated

to increase by 6.0% to KSH272.8bn in 2017 (Word Tourism & Travel Council, 2017). Tourism sector in Kenya is under the MoT,

which was hived from the Ministry for East African Affairs, Commerce and Tourism in 2015 where it had existed as a

unit/department and was thus approved to full ministerial standing. Presently, the ministry is in charge of parastatal that include

the KICC, KTB, Bomas of Kenya, KTDC, TRA, KUC, TF, and the Brand Kenya Board. The sector in the year 2016 contributed

to more than 1 million jobs all through its supply chain and other related investments (Oxford Business Group, 2018).

Due to the enlarged air connectivity inside Africa the number of tourists was expected to grow in 2018, with a growth

projection of 16% as per the tourism ministry mainly attributable to the visa-on-arrival approach adopted for Africans and coupled

with the introduction of direct flights between USA and Kenya (Kirop, 2018). Mombasa is one of the main hubs of Kenyan

tourism and which accounts for over 60 percent of tourist arrivals in the country according to (Standard Digital, 2014). The

Tourism sector in Kenya is the third highest contributor to GDP and forms a poverty alleviation and economic growth source and

is also a viewed as a cornerstone to the attainment of the country’s vision 2030 strategy (Ministry of East African Affairs,

Commerce and Tourism, 2017).

2. Statement of the Problem

In his study, Siro (2013) pointed out that numerous researches have been conducted in the field of corporate finance following

the works of Modigliani and Miller (1958 and 1963) as cited by to determine the influence of an establishment’s choice of its

capital structure. Studies by Mwangi (2016), Birru (2016) and Nassar (2016) tend to have a common revelation that, the structure

of capital in a firm is a critical decision for any firm for it affects the entity in terms of the returns maximization need to the

different investors the firm has but moreover because of the overall power such choices have on the capacity of the entity in

securing financing and its ability to competitively deal with its immediate business environment entirely.

As put forward in the study report by Kashif, Ullah and Ullah (2017) managers of the firm tend to have with them the

discretion to exercise capital structure decision, thus, the structure used may basically be meant to offer protection to the divergent


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interest passed by the managers and not necessarily to maximize the value within the firm more so if the firms’ strategic decisions

tend to be closely guarded as in the scenario of family or own managed firms. They further observed that even in instances were

such shareholding is not closely held, the shareholders are many and geographically diversely distributed and that their level of

shares held are also diversely varied in little proportions and as such they exercise little control over the way the firm is managed

thus, have less interest in the management of the firm’s affairs leaving it at the managers who often pursue different interests from

owners.

In the Kenyan market in the last few years especially in 2017, the cost of debt funds has significantly increased especially with

the bank interest rate capping by the government through the CBK according to (Central Bank of Kenya, 2017). The report further

points out that though this was meant to increase cost of access to borrowed funds, the banks have shied away from giving those

funds especially due to risk of default and have as such increased on the security and other requirements to access such loans

thereby increasing the cost and making firms to consider alternative financing options. According to a study by Kasemo (2015)

the cost of funds has effectively affected the firms’ access to finance by increasing prices or cost of accessing borrowed funds and

has also served to increase the prices of real estate properties.

Most of the previously done studies based on capital structure seem to give findings that seemingly put forward the fact that

there exists a significant affiliation between the capital structure on the company's performance upon probing and manipulating of

firm's specific characteristics such as the size of the firm, non-duality, leverage, growth. From these and other studies and research

done, it was evident that concentration had been on performance and little had been done on the effects of the firm's capital

structure on the financing option available for the firm. Since in Kenya, the tourism sector forms one of the back born income

generator and contributor to overall GDP, the research study sought to understand how the tour firms were financed and operated

in a quest to establish the effect of their capital structure on the firm's financing option and this formed the basis for the

researchers’ study problem.

3. Objective of the Study

The overall aim of this study was to determine the influence of capital structure on access to financing options for tour firms in

Mombasa County.

4. Literature Review

4.1 Theoretical Framework

4.1.1 Modigliani and Miller Capital structure Relevance Theory

In their study findings Ahmeti & Prenaj, (2015), supports the proposition that, while in an effort to determine the value of a

firm, the structure of capital composition indeed matters and is based on modification of the irrelevance theory upon which they

incorporated taxes and it became generally the foundation for contemporary philosophy on capital structure as first advanced by

Modigliani & Miller in the year 1963. According to Mwangi (2016) the theory is basically grounded on the fact that since in

numerous economic jurisdictions, the interest chargeable or otherwise payable on the debt becomes an expense that is allowable

thus forming a tax shield on the business concern so while basing on this assumption, firms can be able to borrow up to 100% in

an attempt to reduce their tax obligation possibility to point zero.

An understanding of the M&M model and its propositions helps in distinguishing between logical and illogical reasons for any

particular financing decisions to be made at any time. Fundamentally, the M&M Models sends a message that any combination of

finance sources is as good as another and as such, while operating under a given market price process, proportionate information,

in the absence of taxes, and agency costs, and in a competent market, the value of a firm will not be affected by how the particular

business concern is financed.

The theory was relevant to the study in that it enabled the researcher to determine whether there’s a preferred capital structure

that best enabled the firm to get access to additional funding should it require such by examining the variables employed in the

study. The fact that the theory provided that capital structure is relevant to the firm; it offered a platform to undertake an incisive

empirical analysis of this relationship within the targeted population.

4.1.2 Pecking Order Theory

In essence, financing comes from three sources; internal funds, debt, and new equity. The pecking order theory in finance

suggests that the cost of operational financing in a firm increases with asymmetric information (Brealey & Myers, 2013). As per

study findings by Kalui (2017), this theory maintains that firms adhere to a specific hierarchy of sources of financing and tend to

prefer in-house financing once such is obtainable, while debt is principally favored over equity if outside financing is obligatory

thus implying that, the form of debt a firm will opt to choose will send a signal of the firms’ need for outside financing. Broadly


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speaking, it implies that business entities will seek to place in order their sponsoring sources by switching from in-house to

external financing depending on the minimal resistance and that they will only switch to external funding as a last recourse after

trying the in-house funding option.

When the firm is not able to reasonably issue any additional debt capital, equity capital will be issued. In their report Gompers,

Kaplan and Mukharlyamov (2015) their study pointed out that managers run the firm on a day to day basis and thus are in a

position to better understand about the operations and environments of the business entity as compared to the investors and as

such, when raising capital by issuing equity, investors tend to think that the administrators are only taking benefit to overprize the

firm for their own selfish interest and this may result to the shareholders assigning a lesser value to the freshly issued equity

stocks. According to Mungai (2016) information asymmetry effect on financing may also be presented by considering that in

normal circumstances, managers and directors who constitute the insiders of the firm tend to have more knowledge concerning the

firm than outsiders as regards the earning potential of the firm.

At the end of it all, investors interpret the issuance of equity by a firm as a clear signal of overpricing thus, if external

financing is unavoidable, the firm will opt for secured debt as opposed to risky debt and firms will only issue common stocks as a

last resort Mungai (2016). In general, the firm will opt for secured debt as opposed to risky debt and firms will only issue common

stocks as a last resort (Brigham, Ehrhardt, Nason, & Gessaroli, 2016).

The theory was relevant to the study in that it aided the researcher in establishing if there exists any clear financial hierarchy

and whether there’s a defined debt ratio as suggested under the trade-off theory for access to financing options for tour firms in

Mombasa County. It helped in establishing the preference to use of internal funds in place of external funds in respect to debt and

equity in an effort to preserve value and firm stability.

4.1.3 Trade-Off Theory of Capital Structure

This theory is entirely based on the assumption that a business may decide on how much of borrowed and of equity finance it

may wish to use by way of balancing the benefits and costs according to (Brigham, Ehrhardt, Nason, & Gessaroli, 2016). It strives

to describe the fact that business entities usually are partly funded by equity and the other part debt finances. This theory permits

insolvency cost to exist and it claims that there is actually a benefit to funding with borrowed funds in that there is tax benefit of

the debt, and that there are costs of financing using debts that includes bankruptcy cost and the monetary cost of the debt

according to (Lindner, Klein, & Schmidt, 2018).

The theory reveals that there will be a drop on the marginal benefit based on any additional rise in debt whereas the marginal

cost will likely increase so that the firm that optimizes its whole worth will emphasize on this trade-off in instances where it is

required to choose how far of equity and debt to use for funding. When they incorporated the effects of corporate taxes and

related the assumption on the existence of arbitrage, they argued that interest on debt; being tax deductible provided extra cash

flows to the levered firm in form of interest tax savings; that increased the market value of the firm (Mungai, 2016). This implies

that in situations of permanent debt, constant debt cost and static marginal tax rate, leveraged firms have more market value than

unlevered firms thus presenting the value of interest tax shield associated with debt financing (Danis, Rettl, & Whited, 2014).

The theory identifies the fact that there exists a tax advantage brought about by interest payments and that in essence, the

interest paid payable on the loaned monies form a tax deductible expense as put forward by (Keightley, 2014). The same is

however not the case with dividends on equity and as such; the real price of debt is a smaller amount than the nominal price of

debt for the reason of the benefits from the tax. According to Graham, Leary, and Roberts (2015) trade-off theory basically

supports that an entity can exploit its financial necessities with credits as far as the bankruptcy cost surpasses the tax benefit value

and therefore, an upsurge its debts up to a given limit value will be of value addition to the entity.

This theory was relevant to the study for it provided a clear understanding of how debt financing increases the firm value

through the tax-deductibility feature associated with the borrowing of funds and at the same time served to show how the capital

structure may negatively influence the firm by increasing the agency costs associated with borrowing.

4.1.4 The Signaling Theory

This theory contends that the firms’ choice on its capital structure sends indications to the external financiers concerning the

information possessed by the insiders (Koech, 2013). According to Mwangi, Muturi, and Ngumi (2016) the theory further

contends that owing to information asymmetry problem, lenders and potential common stock financiers find it difficult to

correctly calculate their risk level and will thus put reliance communications slipped to them by the firms’ insiders. As such, firm

managers are likely to be better informed about the profitability and cash-flow prospects of their firm than outside investors and

that the market may not be able to distinguish firms with rosy prospects from those with less prosperous outlooks due to lack of

reliable data on the differences among firms hence it will price firms almost equally, to the detriment of high-quality companies

and their shareholders thus, this justifies the concept of the signaling theory.


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In their study on Australian firms (Subramaniam, Wahyuni, Cooper, Leung, and Wines (2015) based on survey responses

received from 96 senior administrators in the Australian carbon-intensive companies, they found out that the extent of risk

combination associated with carbon is certainly linked to the presence of a prescribed carbon plan, an oversight of the

involvement of senior managers on the internal audit, the availability of both personnel and funds resources and the participation

by the energy sector. Also provided in the paper are the various perceptions into the risks options and the scenarios provoking a

firm resulting from the pricing mechanism of carbon.

Operative losses of monetary firms can cause severe reputational harms, which are however, characteristically not considered

in the process of operating risk and modeling evaluation and the outcomes lay emphasis on the fact that by far, reputational losses

exceed the preliminary in-operation loss and that ignoring reputational losses may give way to a severe under-provision of some

operational risk types particularly those related to fraud happenings (Eckert & Gatzert, 2017). Additionally, operational risks

cannot be ignored when measuring the performance of the microfinance sector in Kenya and in making strategies for growth and

expansion of the microfinance institutions (Njuguna, Gakure, Waititu, & Katuse, 2017).

The theory was relevant to the study in that it enabled the researcher to establish if really the choice of organization’s capital

structure indicates to the external financiers the information possessed by the insiders and as such, if this was found to have a

bearing on the financing of the entity.

4.2 Conceptual Framework

The study was guided by the following conceptual frame work showing the relationship between the independent variables and

the dependent variable.

Independent Variables Dependent Variable

Figure 1 Conceptual Framework

4.3 Review of Literature on Variables

4.3.1 Short Term Debt

Part of a firms’ capital structure is debt finance under which short term debts are classified. A firm can seek to use short term

debts in financing its operations. A short term debt can be said to be a loan obligation to the firm that is repayable in the current

future or within a period of not more than one year (Grimsley, 2019). If a firms’ operations have stalled and it’s no longer viable

Short term debt

Short term bank loans

Accounts payable

Bank overdraft

Accrued expenses

Long term loans

Long term bank loans

Mortgages

Contingent obligations

Capital leases

Share capital

Ordinary share capital

Preference share capital

Called-up capital

Paid-up capital

Reserve capital

Share premium

Revaluation reserve

Redemption reserve

General reserve

Financing Options

Startup loans finance

Asset finance

Lease finance

Growth finance


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for the firm to proceed with operations without funding, short term loans could be of help to aid the firm to hire more staff and

increase on its efficiency in operations hence increase its profitability. Short term borrowings do not fit every situation since the

interest corresponding with these loans are considerably higher than most of the other conventional options and as such will only

be used by firms seeking to find super-fast funding (Wood, 2019). Short term debt may be best used when the firm has an

opportunity of a revenue creating project at hand but doesn’t have the capital to realize this project. While seeking to secure short

term debt capital, the form should carefully evaluate its availability, speed, duration and ability to qualify.

Short term debts include but not limited to; short term bank loans, accounts payables, bank overdrafts and accrued expenses.

Such can be said to be restricted to acquisition of assets that can easily bring in revenue quickly such as inventory that can be sold

fast to bring in cash (Corporate Finance Institute, 2019). Short term bank loans will include merchant cash advances, lines of

credits, invoice financing and short term loans that are all provided for by the banks with terms of payment strictly less than one

year but with terms varying from the type of loan a firm wishes to take (Wood, 2018).

Accounts payable is when a firm acquires goods on credit that are to be paid back in a short term period and as such accounts

payable management entails the formulation of policies and processes in order to manage credit purchases (Kumaran, 2015).

Strategically if a firm improves on its accounts payables, this can significantly enhance its working capital and can easily finance

its short-term operations before its time to pay settle the payables.

A firm can also adopt the use of bank overdrafts as a form of short-term debt. This is an arrangement where the borrowing

firm approaches a commercial bank and borrows some amount of money usually accessible to some agreed limit to inject in the

business so as to facilitate smooth routine running of the business operations with interest usually pegged only on the amount used

and not the limit available (Finance, 2019). It is typically provided when the firms’ current account is used to pay for business

transactions in excess of the available cash balance. Although theoretically, the amount so loaned is repayable on the demand of

the bank and are generally meant to cover for short term financing (Ayub, Byaruhanga, & Okhaso, 2016).

Accrued expenses are typically the accrued expenses that have been realized or incurred but are yet to be paid for in a firm

since they are yet to be due especially where terms of payment have been agreed upon and are a representation of a liability that

the company is yet to pay for services already received example being taxes, salaries and wages, interest and rates and rent among

many others (Ball, Gerakos, Linnainmaa, & Nikolaev, 2016).

4.3.2 Long Term Debt

These are debt obligations by a firm whose repayment period is more than one year (12 months) from the balance sheet date

and are usually disclosed on the balance with its interest rate and maturity date (Corporate Finance Institute, 2019). These term

debts include and are not limited to long term bank loans, mortgages, contingent obligations and capital leases. A firm wishing to

fund its long term obligations such as purchase of fixed assets and machinery will use long term debt to finance such obligations

(Gill, Mand, Amiraslany, & Obradovich, 2019).

Firms wishing to purchase or acquire expensive assets such as machinery, plant and other assets may approach financial

institutions such as banks for term loans that are payable with interest of a greed period of time ranging from one year and above.

These basically include business loans, student loans, car loans, equity loans and some personal loans that allow that firm to buy

things and slowly pay for them over time that could otherwise be unaffordable (Kokemuller, 2019). Long term bank loans

normally have lower interest rates than short term loans but can usually be restrictive to cash flows since cash generated in future

is used to settle such obligations over a long period of time.

Firms can also utilize mortgages being legal documents signed to contract the firm to refinance or buy a property giving the

lender every right to repossess the property in the event of default of repayment. (Lewis, 2018)These are available from credit

unions, banks, mortgage brokers and companies. The mortgage market can basically be seen as a bigger capital market where

different investors can comfortably assess the risk and returns of alternative investment relative to the mortgage market to

determine their uptake according to (Mburu & Ka’kumu, 2013). Generally, the demand and supply of savings determines the rate

of interest to be charged on the mortgages and this interest forms an expense to the firm and as such, firms must be extra vigilant

in their decision to use mortgage as finance for their firms. A firm could also opt for capital lease financing whereby the firm

having ownership of a certain asset that has value decides to give the rights of use of the asset to another person in exchange of

periodic payments usually termed as lease rentals.

4.3.3 Share Capital

In general, share capital involves that part of a firms’ equity that has been acquired through issue of shares to persons known

as shareholders who are legally seen to be the real owners of the firm and also denotes the type and number of shares that make up

the firms’ share structure (Company Bug, 2015) These shares may be classified into various classes being ordinary, preference

shares and may also include cumulative preference shares and redeemable shares that the firm may have. Share capital forms a

part of external equity that typically represented by paid up share capital, share premium and interest of minority (Mungai, 2016).


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Share capital funding comes with restrictions since firms wishing to get such funding are legally required to obtain

authorization for the to issue and sell additional shares so as to increase their capital. The firm has to specify total amount of

equity it requires and give a breakdown of the base value of such shares technically known as par value. Shares can be held by

individual persons, corporate firms and can be privately or publicly held (Milman, 2018). The owners of the shares are entitled to

a share of profits of the firm after payment of business obligations and secured creditors to the firm in the form of distribution of

dividends usually at a rate determined by the company directors. Shares can be nominal or authorized capital, issued capital, paid-

up capital; called-up capital, uncalled capital or reserve capital and these shares can be issued through a prospectus, placing, offer

for sale, offer by tender, rights issue, bonus issue or through conversion (Kenya Law Resource Center, 2019).

4.3.4 Reserve Capital

Any firm that has just starting will in essence not issue all its shares at once. It will issue some shares at the beginning of its

business and as business progresses depending on need to fund more of its business operations; it will issue more shares to

existing members or float them in public for subscription. In essence, a firms’ reserve capital represents that portion of uncalled-

up capital which the firm members by special resolution, have resolved that the firm shall not call up unless and until it is in

liquidation (Kenya Law Resource Center, 2019). Such capital can only be used in the event of liquidation and as a such no

director’s power to make calls on these share will only be exercisable on the event of liquidation alone.

Reserve capital can also be seen in the form of an account set aside on the firms’ balance sheet to cater for contingencies or to

offset capital losses and usually represents accumulated capital surplus of the firm usually paved out of the firms’ capital profits

such as upward revaluation of its assets or profits on sale of the firms’ assets. They can hence be said to be a sum of funds set

aside and earmarked for future specific purposes, long term firms’ projects, arresting capital losses or long term contingencies and

usually has nothing to do with operating or business activities as its basically from non-trading activities. (Maheshwari,

Maheshwari, & Maheshwari , 2018).

Firms are not obliged legally to have a reserve capital but they should however be able to avail necessary funds in case of a

significant risky event occurrence. This means that the cost of getting such funds will be approximately higher than having a

reserve provision set aside by the firm to cater for such eventualities since the cost of such eventuality cannot be certainly

predicted at the time of staring the project or the business venture, therefore the firm owners have to finance such and the best way

would be through the set-up of a reserve fund to protect the owners from unforeseen risks (Jensen & Sublett, 2017).

5. Research Methodology

5.1 Research Design

As defined by Jongbo (2014) a research design is a structure, plan, and strategy to obtain research answers for research

questions and also to control variances that may arise from the research work. The study adopted a survey research design. The

survey type design of research enables the researcher to describe, explain and portray characteristics of an event or population as it

existed. Related studies such as those done by Kodongo, Mokoaleli-Mokoteli, and Maina (2015) Gathogo and Ragui (2014) and

Birru (2016) among many others have found survey design to be the most applicable research design. Since the survey research

design is descriptive by nature, it aided the researcher in data collection from sampled members of the study population for the

estimation of the population parameters.

According to McLeod (2014) target population can be defined as the total group of entities from which the sample could

possibly be drawn while a sample represents the group of entities who participate in the investigation. Mombasa County has 27

tour operator firms registered and domiciled in the county all under the KATO Mombasa chapter that are fully operational. The

study involved 54 respondents consisting of all the Finance persons (Accountants), Managing administrators (Directors). Table 1

gives the summary of the accountants, managing administrators who at the time of the study worked in the tour firms.

Table1 Target Population

Category of

Operators Category of Respondent

Number of

Respondents Percentage

KATO Accountants 27 50%

Managing Administrators 27 50%

TOTALS 54 100%

5.3 Sample Size and Sampling Technique

The sample size of the study was 54 respondents as in the target population. The study gathered relevant information from 27

Tour operators within Mombasa County that were at the time of the study registered under KATO according to information from


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(Kenya Association of Tour Operators, 2019). There were 27 accountants and 27 managing administrators/directors in all the 27

tour operators sampled. Since the target population was small and below 30, the researcher adopted a full survey of the population

sample and as such administered questionnaires to all the accountants and managing administrators of the tour firms.

6. Research Findings

6.1 Descriptive Analysis

6.1.1 Short Term Debt

Table 2 Short Term Debt

N Mean

Std.

Deviation

The firm has access to short term bank loans 47 3.27 1.638

The firm can comfortably afford to service the short-

term bank loans acquired 47 3.09 1.823

The firm uses account payable to finance operations 47 2.86 1.699

The firm has access to bank overdraft facilities 47 4.00 1.690

The firm’s management has approved credit

facilities with suppliers 47 3.55 1.371

Valid N (listwise) 47

The first objective was to examine the effect of short-term debt on access to financing options of tour firms in Mombasa

County. The statement that the firm has access to short term bank loans had a mean score of 3.27 and a standard deviation of

1.638. The statement that the firm can comfortably afford to service the short-term bank loans required had a mean score 3.09 and

standard deviation of 1.638. The statement that the firm can comfortably afford to service the short-term bank loans acquired had

a mean score of 3.09 and a standard deviation of 1.823. The statement that the firm uses account payable to finance operations had

a mean score of 2.86 and a standard deviation of 1.699. The statement that the firm has access to bank overdraft facilities had a

mean score of 4.00 and a standard deviation of 1.690. The statement that the firms’ management has approved credit facilities

with suppliers had a mean score of 3.55 and a standard deviation of 1.371.

6.1.2 Long Term Debt

Table 3 Long Term Debt

N Mean

Std.

Deviation

The firm has access to long term bank loans 47 3.68 1.359

The firm can comfortably afford to service the long-

term bank loans acquired 47 3.18 1.736

The firm uses mortgages to finance acquisition of

assets and other capital equipment 47 3.09 1.231

Part of the firm’s long-term debt consist of contingent

obligations 47 3.41 1.563

Part of the firm’s capital is from long term lease

contracts 47 3.41 1.652


The second objective was to examine the effect of long-term debt on access to financing options of tour firms in Mombasa

County. The statement that the firm has access to long term bank loans had a mean score of 3.68 and a standard deviation of

1.359. The statement that the firm can comfortably afford to service the long-term loans acquired had a mean score of 3.18 and a

standard deviation of 1.736. The statement that the firm uses mortgages to finance acquisition of assets and other capital

equipment had a mean score of 3.09 and a standard deviation of 1.231. The statement that part of the firm’s long-term debt

consists of contingent obligations had a mean score of 3.41 and a standard deviation of 1.563. The statement that part of the firm’s

capital is from long term lease contract had a mean score of 3.41 and a standard deviation of 1.652.

6.1.3 Share Capital


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Table 4 Share Capital

N Mean

Std.

Deviation

The firm is authorized to issue more shares 47 4.05 1.090

The firm management prefers to issue shares to

existing shareholders to retain control 47 3.55 1.738

The firm share capital consists of a portion of

preference share capital 47 3.36 1.706

All shares of the firm have been fully issued and called

up for 47 3.73 1.579

The firm shares have been fully paid up for 47 3.36 1.529

The company has been quoted on the NSE and can

freely trade its shares on public 47 2.95 1.704


The third objective was to examine the effect of share capital on access to financing options of tour firms in Mombasa County.

The statement that the firm is authorized to issue more shares had a mean score of 4.05 and a standard deviation of 1.090. The

statement that the firm management prefers to issue shares to existing shareholders to retain control had a mean score of 3.55 and

a standard deviation of 1.738. The statement that the firm share capital consists of a portion of preference share capital had a mean

score of 3.36 and a standard deviation of 1.706. The statement that all shares of the firm have been fully issued and called up for

had a mean score of 3.73 and a standard deviation of 1.579. The statement that the firm shares have been fully paid for had a mean

score of 3.36 and a standard deviation of 1.529. The statement that the company has been quoted on the NSE and can freely trade

its shares on public had a mean score of 2.95 and a standard deviation of 1.704.

6.1.4 Reserve Capital

Table 5 Reserve Capital

N Mean

Std.

Deviation

The firm has set aside a share premium reserve 47 2.91 1.477

The firm has set aside revaluation reserve 47 3.68 1.836

The firm has set aside a redemption reserve 47 3.00 1.746

The firm has set aside a general reserve 47 3.86 1.552


The fourth objective was to examine the effect of reserve capital on access to financing options of tour firms in Mombasa

County. The statement that the firm has set aside a share premium reserve had a mean score of 2.91 and a standard deviation of

1.477. The statement that the firm has set aside revaluation reverse had a mean score of 3.68 and a standard deviation of 1.836.

The statement that the firm has set aside a redemption reserve had a mean score of 3.00 and a standard deviation of 1.746. The

statement that the firm has set aside a general reserve had a mean score of 3.86 and a standard deviation of 1.552.

6.1.5 Access to Financing Options

Table 6 Access to Financing Options

N Mean

Std.

Deviation

The firm uses short term debt to finance start-up and

growth of the firm 47 4.36 1.093

Firm finances its Asset and Capital projects through

Asset Financing 47 3.32 1.287

Share capital of the firm is used to finance start up

and growth of the firm. 47 3.91 1.823

The firm may use reserve capital available to finance

growth of the firm 47 3.09 1.151

For growth, owners would rather borrow short term

over long term debt 47 3.00 1.480

The firm has capacity to access lease financing

through Assets that it holds or owns 47 3.36 1.529

Valid N (list wise) 47


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The statement that the firm can comfortably finance its operations from cash flows generated from its operations had a mean

score of 4.36 and a standard deviation of 1.093. The statement that the organization is accessible to financial institutions willing to

advance debt had a mean score of 3.32 and a standard deviation of 1.287. The statement that firm owners are not afraid of external

borrowing that could affect their ownership and the control in the firm had a mean score of 3.91 and a standard deviation of 1.823.

The statement that if external borrowing is so required, the owners would be comfortable issuing long term debt had a mean score

of 3.09 and a standard deviation of 1.151. The statement that if external borrowing is required, the owners would rather borrow

short term over long term debt had a mean score of 3.00 and a standard deviation of 1.480. The statement that owners are afraid of

borrowing public through issue of shares for fear of losing control and ownership had a mean score of 3.36 and a standard

deviation of 1.529.

6.2 Inferential Statistics

6.2.1 Coefficient of Correlation

In trying to show the relationship between the study variables and their findings, the study used the Karl Pearson’s coefficient

of correlation. This is as shown in Table 4.14 above. According to the findings, it was clear that there was a positive correlation

between the independent variables, short-term debt, Long-term debt, Share Capital and Reserve Capital and the dependent

variable financial performance. The analysis indicates the coefficient of correlation, r equal to -0.254, 0.118, 0.557 and -0.190 for

short-term debt, long term debt, share capital and reserve capital respectively. This indicates positive relationship between the

independent variable namely short-term debt, long-term debt and share capital and the dependent variable access to financing

options whereas reserve capital and accessing to financing options showed that there was no relationship.

6.2.2 Coefficient of Determination (R2)

To assess the research model, a confirmatory factors analysis was conducted. The four factors were then subjected to linear

regression analysis in order to measure the success of the model and predict causal relationship between independent variables

(Short term debt, Long term debt, share capital and Reserve Capital), and the dependent variable (Accessing to Financing

Options).

Table 8 Model Summary

Model R

R

Square Adjusted R Square Std. Error of the Estimate

1 .714a .510 .394 2.27049

a. Predictors: (Constant), Reserve Capital, Share Capital, Short Term Debt, Long Term Debt

The model explains 51% of the variance (R Square = 0.510) on accessing to financing options. Clearly, there are factors other

than the four proposed in this model which can be used to predict financing options. However, this is still a good model as

Bryman and Bell, (2018) pointed out that as much as lower value R square 0.10-0.20 is acceptable in social science research. This

means that 51% of the relationship is explained by the identified four factors namely short-term debt, long term debt, share capital

Table 7 Correlations

Access to

Financing

Options

Short

Term Debt

Long

Term Debt

Share

Capital

Reserve

Capital

Access to

Financing

Options

1

47

Short-

Term

Debt

.254 1

.004

47 47

Long-

Term

Debt

.118 .208 1

.001 .353

47 47 47

Share

Capital

.557**

.037 -.261 1

.000 .869 .240

47 47 47 47

Reserve

Capital

-.190 .291 -.395 .176 1

.397 .190 .069 .434

47 47 47 47 47

**. Correlation is significant at the 0.01 level (2-tailed).


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and reserve capital. The rest 49% is explained by other factors in the accessing to financing options, Kenya not studied in this

research. In summary the four factors studied namely, short term debts, long term debts, share capital and reserve capital or

determines 51% of the relationship while the rest 49% is explained or determined by other factors.

6.3 Regression Results

6.3.1 Analysis of Variance (ANOVA)

The study used ANOVA to establish the significance of the regression model. In testing the significance level, the statistical

significance was considered significant if the p-value was less or equal to 0.05. The significance of the regression model was as

per Table 9 below with P-value of 0.00 which is less than 0.05. This indicates that the regression model is statistically significant

in predicting factors of accessing to financing options. Basing the confidence level at 95% the analysis indicates high reliability of

the results obtained. The overall Anova results indicates that the model was significant at F = 4.420, p = 0.012.

Table 9 ANOVA

Model

Sum of

Squares df

Mean

Square F Sig.

1 Regressio

n 91.136 4 22.784 4.420 .012

b

Residual 87.637 43 5.155

Total 178.773 47

a. Dependent Variable: Access to Financing Options

b. Predictors: (Constant), Reserve Capital, Share Capital, Short Term Debt, Long Term Debt

6.3.2 Regression Coefficients

The researcher conducted a multiple regression analysis as shown in Table 10 to determine the relationship between access to

financing options of Tour firms in Kenya and the four variables investigated in this study.

Table 10 Regression Coefficients

Model

Unstandardized

Coefficients

Standardize

d Coefficients

t Sig. B

Std.

Error Beta

1 (Constant) 8.646 6.266 1.380 .186

Short

Term Debt .640 .261 .498 2.456 .025

Long

Term Debt .065 .232 .060 .280 .783

Share Capital .375 .144 .358 2.604 .000

Reserve

Capital -.386 .174 -.479 -2.222 .040

a. Dependent Variable: Access to Financing Options

The regression equation was:

Y = 8.646 + 0.640X1 + 0.065X2 + 0.375X3 + (0.386) X4

Where;

Y = the dependent variable (Access to Financing Options)

X1 = Short Term Debt

X2 = Long Term Debt

X3 = Share Capital

X4 = Reserve Capital

The regression equation above established that taking all factors into account (Access to Financing Options) constant at zero

Access to financing options of Tour firms in Mombasa County, Kenya will be 8.646. The findings presented also showed that

taking all other independent variables at zero, a unit increase in short-term debts would lead to a 0.640 increase in the scores of

access to financing options of Tour firms in Mombasa County; a unit increase in long-term debt would lead to 0.065 increase in

access to financing options of Tour firms in Mombasa County; a unit increase in share capital would lead to a 0.375 increase the

scores of access to financing options for Tour firms in Kenya and a unit increase in reserve capital would lead to negative 0.386

increase the scores of access to financing options of Tour firms in Mombasa County.


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7. Conclusions and Recommendations

7.1 Conclusions

On short term debt, the study results showed that the t-value was 2.456 and p-value was 0.025. From this result the study

rejected the null hypothesis that short-term debt has no significant effect on access to financing options of tour firms in Mombasa

County. The study therefore concludes that short-term debt has a significant effect on access to financing options of tour firms in

Mombasa County.

The study results revealed that the t-value was 0.280 and p-value of 0.783. From the results the study accepted the null

hypothesis that long-term debts have no significant effect on access to financing options of tour firms in Mombasa County. The

study, therefore, concluded that long-term debt has no significant effect on access to financing options in Mombasa County.

The study results revealed that the t-value was 2.604 and p-value of 0.000. From the results the study rejected the null

hypothesis that share capital has no significant effect on access to financing options of tour firms in Mombasa County. The study,

therefore, concluded that share capital has a significant effect on access to financing options in Mombasa County.

The study results revealed that the t-value was -2.222 and p-value of 0.040. From the results the study accepted the null

hypothesis that reserve capital has no significant effect on access to financing options of tour firms in Mombasa County. The

study, therefore, concluded that reserve capital has a significant effect on access to financing options in Mombasa County.

7.2 Recommendations

The study recommended the following:

i. That tour firms should negotiate for long-term debts with financiers as this helps the firm to plan for its liquidity.

ii. That tour firms should keep a margin of its profitability in reserves for future financing since it is a cheaper way of

financing.

iii. That tour firms should consider listing on the securities exchange

iv. That tour firms should consider mergers amongst tours and travel sector to build on synergy and create competitive

advantage.

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