ASSET-BASED FINANCING AND THE FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN RUIRU TOWN, KIAMBU COUNTY, KENYA

Abstract

Kenya's economic advancement continues to place a strong emphasis on Small and Medium Enterprises (SMEs), but they are still struggling to obtain adequate financing. Often, they are not accepted as conventional bank loans because of the strict collateral requirements, slow approval times, and inflexible repayment structures, which makes many loans vulnerable to liquidity pressures. By using receivables, inventory, or equipment to secure credit and maintain ownership, asset-based financing is a flexible approach that can enhance working capital. The effectiveness of asset-based financing for SMEs in Ruiru Town, Kiambu County, a developing commercial district near Nairobi, was investigated in this study. This research, which was based on Agency Theory and Trade-Off Theory, utilized a correlational design with stratified random sampling. Data were obtained from 198. Descriptive statistics, correlation tests and regression analyses) of SMEs by means of structured questionnaires. It concluded that asset-backed financing improved the outcomes of SME businesses, particularly in terms of cash flow, profitability, and potential reinvestment. Receivables financing and equipment leasing were the most favorable options, with inventory-based credit offering only moderate advantages. The extent of progress achieved varied by industry, with manufacturing and retail firms benefiting the most due to their asset intensity, while service-oriented businesses received only minor benefits. These disparities highlight the need to create financing tools that reflect the unique asset structures of each industry. According to the study, effective use of asset-based financing necessitates a favorable policy environment, simplified collateral registration systems, and better financial literacy among SME owners. Additionally, Stronger institutional frameworks and targeted awareness campaigns would contribute to the enhancement of confidence in asset-backed credit products. On the whole, asset-based financing can be a practical and effective way to increase the access of SME's to credit, reduce dependence on collateral, and foster sustainable growth within Kenya as businesses continue to evolve.