Effect of Debtors on Performance of Small and Medium Enterprises

Abstract

The paper assesses effect of credit sales on performance of small and medium
enterprises (SMEs) in Tanzania using the credit risk management perspective.
Asymmetric information and trade-off theory of liquidity guided the study
whereby a dataset of 6,134 Tanzanian SMEs was used.  Descriptive and
regression methods were used as analyses techniques. Results confirm that
majority of SMEs sell on credit (54%).  Despite efforts they put into managing
their debtors, 26 percent of them default. The results further showed that SMEs
incur relatively high costs when managing debtors, an aspect, which hampers
their performance.  Costs incurred relate to financing, administration and moral
hazards problems. The paper contributes to asymmetric information and tradeoff

of liquidity theories by showing how the relationship between SMEs and
debtors can be hampered by ex-post asymmetric information whereby debtors
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decide to act in their own interests but against seller's interests, a pattern, which
contravenes terms of their contracts. The study highlights main challenges faced
by SMEs while managing debtors. Bad debts put pressure on SMEs’ cash flow
thereby limiting growth of their businesses. Education level was seen to be
important when managing debtors.