The effect of debt financing on the financial performance of SMEs in Zimbabwe

Abstract Globally, SMEs contribute immensely to economic growth and development in both developed and developing countries. This necessitate the need for funding for SMEs for them to contribute meaningfully and sustainably to economic growth and development. Nevertheless, SMEs funding remain a challenge in most countries especially developing ones. Therefore, this study aimed to establish the effect of debt financing (short-term debt, long-term debt, and trade credit) on the financial performance of SMEs in Zimbabwe. Financing SMEs has been a challenge for many SMEs worldwide. Notwithstanding that SMEs contribute immensely to the growth of an economy, SMEs remain underfunded especially in developing economies. Their contributions include poverty reduction, increased job opportunities, competitiveness, and productivity in the industrial sector. This study adopted a positivism philosophy and a cross sectional survey design. Quantitative data were gathered from 210 SMEs using a structured questionnaire with Likert-type responses. The findings show that debt financing (short-term debt, long-term debt, and trade credit) positively influences the financial performance in emerging markets. This study contributes to studies that prove a significant relationship between debt financing and financial performance in sectors other than SMEs. Thus, SMEs are advised to use debt financing to improve their financial performance.


PUBLIC INTEREST STATEMENT
Debt financing contributes a crucial role in the success of SMEs.This study examines effect of debt financing on the financial performance of SMEs.The study specifically tests the effect of short-term debt, long-term debt, and trade credit on the financial performance of SMEs.The study established that debt financing (short-term debt, long-term debt, and trade credit) positively influences the financial performance in emerging markets.Thus, SMEs are advised to use debt financing to improve their financial performance.
debt financing and financial performance in sectors other than SMEs.Thus, SMEs are advised to use debt financing to improve their financial performance.

Introduction
The transition of small and medium-sized enterprises (SMEs) to large businesses or corporations is pivotal in any economy in the world (Addaney et al., 2016;Erdogan, 2018).It is a relative measure of how well an economy is performing, as SMEs are the seedbed of business growth, innovation, and pillars of employment creation as well as poverty reduction (Erdogan, 2018;Meher & Ajibie, 2018;Mwika et al., 2018).Polishchuk et al. (2020) highlight that SMEs are the main drivers of the economy because they are recognized as fundamental growth pillars in achieving the country's long-term national development strategy.
The immense achievements of SMEs in economic development and growth are quite tremendous (International Monetary Fund, 2019;Mamaro & Legotlo, 2020).In Zimbabwe, SMEs contribute $8.58 billion to the country's GDP in 2016 and employed more than a 5.9 million people, that is, over 75% of the total workforce of 7.8 million (International Monetary Fund, 2019).Furthermore, SMEs now make up over 70% of Zimbabwe's revenue authority database of registered taxpayers, while contributing only 20% of taxes.Despite their important role in the economic scenario, SMEs face difficulties in accessing finance with a lack of investment opportunities worldwide.SME operations require capital, which can be raised using various methods (International Monetary Fund, 2019).Previous studies have identified several challenges confronting SMEs in a globalized environment (Mwika et al., 2018).SMEs have low mortgage assets, which leads to difficulties accessing external capital from outside (Kamal & Flanagan, 2014;Lampadarios, 2015;Muriithi, 2017).Debt from financial institutions is an approach to raising capital (Mwika et al., 2018).Debt financing can be either short or long-term, and can be used by SMEs to set up or develop their businesses (Meher & Ajibie, 2018).
In contrast, SMEs may contrarily be posed to face a vital challenge of financial resources, which may stifle their growth in performance and continuity (Ye & Kulathunga, 2019).This poses a challenge for SMEs to improve their results, as banks and other organizations evaluate their financial performance before doing business with them (Quaye et al., 2014).SMEs face significant challenges in improving their financial performance because short-term, trade credit, and longterm loans are poorly managed (Ye & Kulathunga, 2019).This could be because SMEs do not employ the appropriate degree of debt in their day-to-day transactions, and if the problem is not addressed, they would continue to endure financial hardships and business closures (Mamaro & Legotlo, 2020).Gök (2009) argues that SMEs still experience various difficulties in improving their financial performance because short-term loans, trade credit, and long-term loans are not well managed.This may be because SMEs fail to use ideal debts in their day-to-day transactions, and if this problem is not addressed, it may continue to cause financial distress and business failure among SMEs (Kose et al., 2020).Nevertheless, the abundance of loan facilities and the demanding approval requirement of scarce available equity funds have led many SMEs to resort to debt (Ye & Kulathunga, 2019).This phenomenon is theoretically and practically acceptable from the loan providers' perspective, owing to the perceived high risk of moral hazard problems among small and medium enterprises (Karedza et al., 2014;Mamaro & Legotlo, 2020).While debt is necessary for the free flow of cash in the operation of SMEs, the proportion of debt in their financial structure may pose problems to their financial health and performance (Nazir et al., 2021).Karedza et al. (2014) discovered that limited access to funding, high financing costs, and a lack of managerial skills were the most significant obstacles faced by SMEs in Zimbabwe.Mudavanhu et al. (2011) discovered that a lack of basic business management experience, credit, import competition, and high raw material costs were the key causes of SME failure.Gombarume (2014) noted that most SMEs did not receive sufficient financial support from financial institutions and did not perform well.Yet, financing is required for efficient and effective business performance, and the availability of debt finance is critical for a company's expansion (Karedza et al., 2014;Nazir et al., 2021).
On the other hand, debt finance, if not properly managed, can cause financial difficulties for corporations (Gombarume, 2014).Since SMEs rely on third-party capital for external funding; they must maintain their levels of indebtedness under control, as excessive levels of indebtedness raise the firm's financial risk and likelihood of bankruptcy (Mazikana, 2021).SMEs have difficulty obtaining appropriate financing because they are regarded as lacking collateral security, and banks are unwilling to fund their operations (Muriithi, 2017).The cost of financing SME operations is very high in terms of the high borrowing costs, high default rates, and high credit risk factors that they pay at banks and other financial institutions (Githaigo & Kabiru, 2015).Access to credit facilities remains a major challenge for SMEs in Zimbabwe and other developing countries, with short and medium-term interest rates ranging from 50 to 55 percent annually (Karedza et al., 2014).SMEs that have access to credit have become trapped in a credit cycle, while others have left the industry because of difficulties in recovering loans (Karedza et al., 2014;Mazikana, 2021).

Research gap
The recent literature on SMEs debt financing suggests that, until now, no tool has been provided to deal with debts in general and its effect on SMEs' financial performance.Theories have not fully accommodated the capital structure.Additionally, empirical research has not specified how an optimal capital structure can be determined.In the existing finance literature, no practical tool has been developed to enable SMEs to determine the best debt financing that will suit their financial performance.SMEs still experience various difficulties in improving their financial performance because short-term, trade credit, and long-term loans are not well managed.This may be because SMEs do not use ideal debts in their day-to-day transactions, and if this problem is not addressed, it may continue to cause financial distress and business failure.Therefore, this study seeks to address this practical gap to assist SMEs in Zimbabwe and beyond.
Moreover, past researches (Abor, 2004;Agyapong & Attram, 2019;Agyei & Nsiah, 2018;Fatoki, 2012;Kira & He, 2012;Mamaro & Legotlo, 2020;Obuya, 2017;Ye & Kulathunga, 2019) have highlighted the major factors influencing SMEs' success, emphasizing the availability of finance, managerial competency, and financial literacy.These studies did not concentrate on how debt financing affects long-and short-term financial efficiency in organizations.Hence, research gaps need to be addressed.Specifically, this study examines the effect of financing through debt on the performance of SMEs in Zimbabwe.This research gap has motivated researchers to fill this void and add to the body of knowledge on the current debate on the effect of debt financing on SMEs' financial performance.
The objectives of the study are therefore to determine the effect of debt financing (short-term debt, long-term debt, and trade credit) on the financial performance of SMEs.The paper is organized as follows: introduction, research gap, theoretical framework, development of research hypotheses and research model, research methods, analysis and results, discussion and implications, conclusion, limitations of the study and further research implications.

Theory underpinning the study
The study was guided by theory of capital structure.Its underlying assumptions shows that capital structure affects firm's value and performance, which means that the amount of leverage in capital structure affects firm performance.

Debt financing
Debt financing involves procurement of interest-bearing instruments secured by asset-based collateral and have short-term or long-term structures (Githaigo & Kabiru, 2015;Kamal & Flanagan, 2014;Mamaro & Legotlo, 2020).While debt is necessary for the free flow of cash in the operations of SMEs, the proportion of debt in their financial structure may pose a problem to their financial health and performance (Githaigo & Kabiru, 2015).Focusing on SMEs' debt financing, it is necessary to emphasize the importance of the debt structure (i.e., long-term, short-term debt, and trade credit) in financing SMEs (Githaigo & Kabiru, 2015).Debt financing is a major source of capital for truly emerging firms because retained earnings are insufficient or unavailable (Mazikana, 2021).SMEs depend on debt financing because debt financing is relatively cheaper than equity financing (Pandey & Sahu, 2019).In addition, firms have insufficient track records, resulting in relatively higher risk for capital suppliers (Ahmad & Ejaz, 2019).Therefore, banks are less likely to provide money to such firms (Aziz & Abbas, 2019).In structuring their liabilities, firm managers must choose their associated maturity, considering many of the same issues and constraints that affect the choice of a debt maturity structure (Ahmad & Ejaz, 2019).Debt management and accountability can assist in lowering borrowing costs, debt sustainability, and fiscal risks (Kose et al., 2020).
The level of debt financing must be moderate to avoid large interest payments, which can prevent SMEs from investing in internal sources of finance (Aziz & Abbas, 2019).Financing is essential for SMEs to establish and grow their operations, expand new products, and invest in new employee services (Pandey & Sahu, 2019).In other words, financing is key to the financial performance (Aziz & Abbas, 2019;Mazikana, 2021).Most scholars agree that SMEs continue to face the problem of a scarcity of funds (Aziz & Abbas, 2019).For example, Ukpong (2002) reports that SMEs have limited debt funding opportunities and experience limited access to capital markets (equity financing).This is coupled with the fact that most owners of SMEs do not have sufficient personal savings to satisfactorily run their businesses, and it remains a big threat to SMEs performance in general and their financial performance specifically (Aziz & Abbas, 2019).Amidst these conditions, the proponents of debt financing as a funding alternative for SMEs maintain that it remains the most viable option for SMEs (Lutwama, 2011;Mwenda, 2018;Quainoo, 2011).However, critics of debt financing point to challenges such as high interest rates, demand for collateral, bureaucracy in accessing loans, unfavorable repayment schedules, and the associated risks of loan repayment as strong disadvantages of debt financing (Pandey & Sahu, 2019).Critics argue that such challenges generally affect SME performance (Mazikana, 2021).Aziz and Abbas (2019) argues that some financial institutions are reluctant to lend money to SMEs because of the perception that lending is not economically feasible.Debt financing for SMEs is also considered a high-risk and unsuccessful business owing to the lack of accurate and reliable information on the financial condition and performance of many SMEs, unconvincing and weak business plans, and weaknesses in the management of SMEs (Ahmad & Ejaz, 2019).The relationship between debt financing and firm performance is an important financial issue (Kose et al., 2020).
Businesses require capital to function efficiently and effectively, so SMEs choose to use internal cash, debt, or equity to support their activities (Anning et al., 2016).Financial institutions' funds are used to raise debt financing (Ahmad & Ejaz, 2019).Consequently, company performance is determined by the amount of money invested in businesses (Quaye et al., 2014).On the other hand, debt overhangs could hinder investment for a long time if bankruptcy regulations are not followed effectively (Quaye et al., 2014).Many studies have identified inaccessibility to capital as a significant hurdle inhibiting SMEs' contributions to national growth (Antwi et al., 2013;Quaye et al., 2014;Rahman et al., 2019).Fama and French (2002) postulate that the benefits of debt financing include the tax deductibility of interest and the reduction of free cash flow problems, whereas the costs of debt financing include potential bankruptcy costs and agency conflicts between stockholders and debt holders.Therefore, in making debt financing decisions, managers try to create a balance between the corporate tax advantages of debt financing and the costs of financial distress arising from bankruptcy risks and agency costs (Ahmad & Ejaz, 2019).
Debt financing can be influenced by bankruptcy costs, changes in interest rates, and taxation in the presence of other variables within a business, since firms are likely to use debt financing when the business responds very poorly and has problems with insufficient funds (Pandey & Sahu, 2019).Debt financing is a measure of the future ability of SMEs to pay back loans (García & Herrero, 2021).The company might hit hard times, or the economy once again experiences a meltdown (García & Herrero, 2021).As expected, the business may not grow as well as expected (Rahman et al., 2019).Debt is an expense and you have to pay expenses on a regular schedule, which could impede the company's ability to grow (Mwenda, 2018).Higher debt leverage means a reduction in cash flow, and, as a result, agency issues are reduced, which can occur when management spends money on projects that do not increase company value (Park & Jang, 2013).Moreover, a higher debt leverage implies that free cash flow is spent more on servicing debt, which would have been invested in revenue-generating assets (García & Herrero, 2021).Li et al. (2022) argue that short-term debt is not affected by the trade-off between tax benefits and bankruptcy costs and that long-term debt is affected by collateralisable assets.Short-term debt in an environment of incomplete contracts grants the lender a control right, as the firm's ability to roll over debt may be conditioned on financial ratios and adequate performance (Githaigo & Kabiru, 2015).Rolling over the debt as a mechanism to assist SMEs limits managerial discretion and may contribute to the relaxation of financial constraints (Rahman et al., 2019).Once SMEs get this roll over debt, this result in increased availability of external financing and should stimulate better performance (Githaigo & Kabiru, 2015).García-Teruel and Solano (2007) find that short-term debt is positively correlated with a firm's growth opportunities.Short-term debt is the best financing tool, because it is perceived to be cheaper (Rahman et al., 2019).Thus, both entrepreneurs and banks prefer short-term debt (Li et al., 2022).

Short-term debt
Relying heavily on short-term credit for financing working capital has both advantages and risks (Altaf & Ahmad, 2019).Using a greater proportion of short-term credit to finance working capital may have a positive impact on a firm's performance because short-term credit easily adjusts to firms' financial needs (Li et al., 2022), short-term finance mitigates agency problems (Baños-Caballero et al., 2016), solves the problems of underinvestment because of periodic credit renewal (Ozkan, 2000), builds relations with the bank or with any other lender because of frequent renewals, and is less costly because the nominal rate of interest is lower for short-term credit (Rahman et al., 2019).Contrary to the above arguments, greater reliance on short-term credit may also have a negative impact on a firm's performance (Bajaj et al., 2021).The negative impact of a greater proportion of short-term financing can be due to refinancing and interest risk (Altaf & Ahmad, 2019).It might be difficult for firms to renew their short-term loans, and accordingly, they might pay higher interest rates for new loans (Boateng et al., 2022).Thus, it negatively impacts firm performance (Baños-Caballero et al., 2016).The positive and negative impacts of using short-term credit to finance working capital depend on the proportion of short-term credit used (Bajaj et al., 2021).Thus, there may be an inverted U-shaped relationship between working capital financing and firm performance (Boateng et al., 2022).
The proportion of short-term debt used to finance working capital depends on the level of financial constraints faced by a firm (Altaf & Ahmad, 2019).As Li et al. (2022) suggest, working capital investment is more sensitive to financing constraints than investments in fixed capital.Accordingly, firms that face fewer financial constraints are in a better position to obtain short-term bank loans on better terms and face lower interest and refinancing risk (Baños-Caballero et al., 2016).Based on this logic, firms facing lower financial constraints are expected to finance a greater proportion of working capital by utilizing short-term debt (García & Herrero, 2021).
SMEs borrow short-term loans because they are cheaper and do not require security but rather the firm's reputation (Caragnano et al., 2020).Short-term loans have conflicting effects on SMEs' financial performance, which is positive, negative, and unrelated at all, as measured by gross profit margin and return on assets (Ebaid, 2013).Short-term bank loans have been found to have a positive impact on SME profitability, expansion, and earnings of SME (Kyarikunda, 2018).Shortterm credit is a significant factor in enhancing business growth and financial performance in particular (García & Herrero, 2021).
Although many scholars have highlighted the value of short-term loans, few have provided guidance on the basis of accessing and using such loans (Subrahmanyam, 2009).Mwenda (2018) comprehensively discussed the best times to use short-term loans and argued that, whether SMEs are working with a provisional financial crisis, short-term loans are key in addressing a cash crunch.This is because the short-term nature of these loans is an extra cost (Subrahmanyam, 2009).Short-term loans should be at a lower rate than long-term loans (Rahman et al., 2019).This implies that SMEs pay a higher interest in short-term loans than in long-term loans (Rahman et al., 2019).

Long-term debt
Long-term debt is an obligation with a maturity period of more than one year, such as bonds (Peng et al., 2022).Firms should use more long-term debt because it has less negative impact on financial performance as long as the cost of debt does not exceed the required rate of return of the firm (Makanga, 2015).The lack of accessibility to long-term credit is a key limitation limiting the development of the SME sector and its financial performance in particular (Amadeo & Brock, 2021).
Long-term debt limits managerial discretion by making access to new funds and overinvestment less likely, a feature that enhances profitability (Caragnano et al., 2020).Githaigo and Kabiru (2015) argued that long-term loans may lead to improvements in productivity.An econometric study by Hernández-Cánovas and Koëter-Kant (2008) suggests that the important variables in determining SMEs' long-term debt include the length of the banking relationship and number of banks involved.
Long-term debt is normally raised by financially stable enterprises for a period of seven years and above and secured by collaterals (Li et al., 2022).SMEs use more long-term debt, expecting that their financial performance will improve (Amirkhani & Far, 2009).In practice, long-term investments are supported by the proper utilization of long-term loans to generate sufficient profits to repay loans, cover all costs, and distribute the surplus accordingly (Amirkhani & Far, 2009;Caragnano et al., 2020).SMEs' overdependence on long-term loans hampers business owners from recouping the capital invested, increasing financial costs, and the chance of bankruptcy is imminent (Kyarikunda, 2018;Kyomuhendo, 2014;Obuya, 2017).However, long-term loans show no significant relationship with financial performance, as measured by return on assets and gross profit margin (Ebaid, 2013).
SMEs use long-term loans to boost their businesses, this means that in the absence of such longterm loans, the business operations of many small-scale enterprises can be easily constrained (García & Herrero, 2021;Kyarikunda, 2018).Access to long-term loans is associated with a high cost of capital for SMEs (Gajdosikova & Valaskova, 2022).At the same time, the majority of financial firms categorize SMEs as high risk; therefore, high default leads to high interest charges (Kyarikunda, 2018).Kyarikunda (2018) argued that long-term loans are suitable for several deposit-taking financial companies, such as cooperative and commercial banks, who give mid-term loans for to 3-5 years with an agreement on the cost.The fact that such loans are suitable for depositing financial institutions and other financial service providers justifies the need to quantify their effects on the financial performance of SMEs (Gajdosikova & Valaskova, 2022).Li et al. (2022) emphasizes that long-term business and financial decisions lead to future cash flows, which, when discounted by the cost of capital, establish the market value of a firm.Therefore, current assets and liabilities with maturities of less than one year, should be managed cautiously (Kyarikunda, 2018).

Trade credit
Trade credit arises in situations where suppliers do not require immediate payments for whatever batches of goods and services are supplied to a business until the given credit period (Kyarikunda, 2018).Trade credit contract terms and the volume of trade credit are significant parts of trade credit because they determine the implied interest in trade credit, that is, the price of trade credit (Obuya, 2017).When delivery and payment do not occur simultaneously, payment arrangements define credit terms (Kyarikunda, 2018).
The debt financing option also takes the form of trade credit, also known as spontaneous credit from suppliers (Obuya, 2017).SMEs should also focus on trade credit to optimize their financial performance (Githaigo & Kabiru, 2015).Trade credit may be necessary when SMEs face cash inflows that hamper them from purchasing their merchandise on a cash basis and, at the same time, serve as a safety net when suppliers offer discounts for earlier settlement; conversely, suppliers impose penalties on SMEs to breach contractual obligations (Cuñat & Garcia-Appendini, 2012;Obuya, 2017).Trade credit, as a spontaneous source of finance, could be cheaper than bank loans (Obuya, 2017).
Trade credit is advantageous to SMEs because of the transaction cost reduction that could have been incurred if payment was to be made instantly on the delivery of goods (Amadeo & Brock, 2021).However, trade credit is associated with SMEs' liquidation, which forces them to seek alternative financing options (Caragnano et al., 2020).In conditional terms, the supplier may require payment for the goods to be made within a certain period of time after delivery and offer a discount or charge penalties when the buyer breaches the contractual obligation, raising the cost of trade credit (Cuñat & Garcia-Appendini, 2012;Denisova, 2000).
Several authors have demonstrated that trade credit provides a safety valve for firms facing idiosyncratic liquidity shocks (Boissay & Gropp, 2007;Cuñat, 2007;Kapkiyai & Mugo, 2015;Wilner, 2000).Pindalo et al. (2006) argued that, through trade credit, suppliers can reduce the transaction costs associated with the liquidation of each individual commercial exchange.Ferrando and Mulier (2012) argued that small and young SMEs are more likely to be financially constrained; hence, they rely more on the trade credit channel to manage growth.Thus, the high interest rates associated with trade credit reflect the fact that low-quality firms choose this type of financing from their suppliers (Pindalo et al., 2006).Kapkiyai and Mugo (2015) argued that trade credit is an important source of finance for SMEs, particularly SMEs with difficulties in obtaining external funding via credit institutions such as banks.This confirms the typical procyclical pattern of accounts payable and receivable, as they are closely linked to the exchange of goods and services, and hence, to economic activity (Ferrando & Mulier, 2012).However, this cycle has not been observed (Kapkiyai & Mugo, 2015).Studies have concluded that SMEs with low credit worthiness are likely to be financed more by suppliers where liquidation is more likely to occur (Kapkiyai & Mugo, 2015).Cuñat (2007) argues that fast-growing firms may finance themselves with trade credit when other types of finance are not sufficiently available.Caragnano et al. (2020) revealed that firms with high profit margins, that is, those that would benefit most from making additional sales via price discrimination, indeed have higher accounts receivable.Bougheas et al. (2009) argue that accounts receivable is important for inventory management performance.Ferrando and Mulier (2012) argue that firms provide more trade credit to customers in temporary distress.This also enhances sales; otherwise, the distressed customer would not be able to buy the goods (Obuya, 2017).However, firms will only offer additional trade credit when they believe there is a future surplus of having a long-lasting relationship with that customer (Cuñat, 2007).Peng et al. (2022) argue that for a given liquidity, an increase in production will require an increase in trade credit.Bougheas et al. (2009) argued that fast-growing SMEs may finance themselves with trade credit when other types of financing are not sufficiently available.Boissay and Gropp (2007) argue that SMEs facing a liquidity shock try to defeat this troubled condition by passing on shocks to their providers by taking more trade credit.Therefore, trade credit proved to be a feasible debt financial instrument at the discretion of committed businessmen, which significantly adds to financial performance (Kyarikunda, 2018).The theoretical basis of the relationship between trade credit and financial performance shows that trade credit substantially influences companies' financial performance (Obuya, 2017).

Financial performance
SME financial performance is most often defined as hard criteria, such as increased turnover or wider profit margins and the ability to contribute to job and wealth creation through business start-up, survival, and growth (Chell & Baines, 1998;Sandberg et al., 2002).Financial performance can be measured using proxies, such as profitability, return on assets, liquidity, solvency, and sales growth, all of which can be extracted from financial statements and/or reports (Miller et al., 2012).
The financial formation of an organization and its capability to settle its obligations on time are influenced by cash flow, leverage, and liquidity (Miller et al., 2012).Each of the three types of measures is linked to a distinct element of this attribute of firm operation (Kyarikunda, 2018).The organization's financial structure is explained by leverage measures that incorporate debt to total assets, time interest earned, and debt to equity (Subrahmanyam, 2009).The interval measure, current ratio, quick ratio, and all measures of liquidity can be used to assess the ability of an organization to convert assets into cash (Miller et al., 2012).Lastly, measures of cash flow explain the organization's cash in total that is generated and where it comes from comparison to the cash demands of the organization measured through cash flow to assets and equity (Miller et al., 2012).

Leverage
A firm's financial formation is measured using leverage ratios.The extent to which current assets are financed by borrowed funds as compared to owners' funds is financial leverage (Penman, 2001).Regular honor of loan repayment plus interest entails debt agreements (Obuya, 2017).Ordinary shareholders have no obligatory call to pay returns either periodically or at the time of termination of the firm's business (Subrahmanyam, 2009).As a result, holders of debt obtain an inflexible return, whereas ordinary shareholders obtain the remaining once all interested parties are satisfied (Ahmad & Ejaz, 2019).Consequently, if the profits earned by the firm exceed the cost of debt, ordinary shareholders enjoy surplus profits over the cost of debt finance turns out to be enjoyed by the ordinary shareholders (Penman, 2001).In a firm that is not able to make profits that are more than the cost of debt finance, ordinary shareholders earn no return, but debt holders continue to earn a fixed rate of return (Sandberg et al., 2019).Owners have a high chance of losses and gains when there is a high debt-equity ratio (Ahmad & Ejaz, 2019).This connection is usually known as a trade-off between gains and losses for firm owners (Pandey & Sahu, 2019).When the leverage of a firm is high, there is a higher chance of bankruptcy in bad seasons; however, during good times, the chances of high profits to be enjoyed by equity capital providers is high (Sandberg et al., 2019).

Liquidity
Liquidity measures whether firms are in a position to pay the required amount of borrowed funds when the time to pay is due (Ahmad & Ejaz, 2019).A company's assets are said to be liquid if they can be converted into cash within a relatively short period without loss of value (Brealey & Kaplanis, 2001).Whether a business is gaining more capital to ensure the smooth running of its activities without endangering its liquidity position is a significant performance issue (Githaiga & Kabiru, 2014).Given that liquidity measures denote one element of organizational performance, inadequate indicators can signify a complete concept (Brealey & Kaplanis, 2001).Together, absolute and percentage terms can be used to measure liquidity (Subrahmanyam, 2009).Working capital, which is an excess of a current asset over a current liability, is a good measure of organizational liquidity (Brealey & Kaplanis, 2001).The period in which a firm can conduct its trading transactions by utilizing assets that are liquid and do not affect sales can also be used as an interval to measure liquidity (Githaiga & Kabiru, 2014).The acid test ratio, current ratio, and working capital changes are some of the measures of liquidity (Githaiga & Kabiru, 2014).
The terms and conditions of debt contracts together with other debt requirements are not shown by computation from financial statements, which therefore indicates a crucial weakness in measures of liquidity (Brealey & Kaplanis, 2001).Normally, the cost of debt is higher than what investment in the short term can earn, and a good business practice will be to use all cash that is in excess in reducing interest-earning current liabilities given that the current arrangement on borrowing can be replaced within the shortest time possible (Hernández-Cánovas & Koëter-Kant, 2008).Real liquidity can be underreported by firms' financial statements because of the inability to report excess liquidity arising from the organization's current arrangement on borrowing, which enhances access to capital (Githaiga & Kabiru, 2014).

Cash flow
Apart from meeting current obligations, cash flows can also be used to measure a firm's ability to pay capital contributors (Githaiga & Kabiru, 2014).The financial advantage or worth attained from a firm is influenced by the cash payments obtained by resource providers (Hernández-Cánovas & Koëter-Kant, 2008).Copeland et al. (2000) and Jones ( 2009) maintain that anticipated cash flow and investors' cash pay-out timing are the usual business valuation approaches.Cash flow is the current determining factor of a firm's value, and for this reason, the cash flow accessible by investors can therefore be measured as part of a firm's performance (Copeland et al., 2000).Brealey and Kaplanis (2001) theorized measures of cash flow to include cash flow as a percentage of one return on equity, percentage of return on assets, net cash flow from operations, and the growth rate of operating cash flows.Every measure deals with the cash available to the organization that enables it to acquire the funds required for financing and investment activities (Jones, 2009).

Development of research hypotheses and research model
There is general consensus in the literature that short-term debt has a positive effect on financial performance (Altaf & Ahmad, 2019;Dube, 2013;Jepkorir & Gichure, 2019;Kyarikunda, 2018;Muchugia, 2013;Slav'yuk & Slaviuk, 2019).Another study conducted by Githaigo and Kabiru (2015) established that the increased availability of external finance stimulates better performance.Likewise, Xu et al. (2021) find that short-term debt is positively correlated with a firm's growth opportunities.Therefore, we propose the following hypothesis: H1: Short-term debt has a positive effect on financial performance of SMEs in emerging market.
Previous studies have concluded that long-term debt has a positive effect on financial performance (Ahmad & Ejaz, 2019;Dube, 2013;Meher & Ajibie, 2018;Quainoo, 2011;Slav'yuk & Slaviuk, 2019).In a study by Makanga (2015), firms were encouraged to use more long-term debt because there is less negative impact on financial performance as long as the cost of debt does not exceed the required rate of return of the firm.Similarly, Githaigo and Kabiru (2015) argue that long-term loans may lead to improvements in productivity.Likewise, Xu et al. (2021) argue that SMEs use more long-term debt, expecting that financial performance will improve.Therefore, we propose the following hypothesis: H2: Long-term debt has a positive effect on financial performance of SME in emerging market.
Literature confirms that trade credit has a positive effect on financial performance (Dube, 2013;Kapkiyai & Mugo, 2015;Kyomuhendo, 2014;Slav'yuk & Slaviuk, 2019;Xu et al., 2021).Githaigo and Kabiru (2015) found that SMEs should focus on trade credit to optimize their financial performance.Similarly, Ferrando and Mulier (2012) argue that SMEs should rely more on trade credit channels to manage growth.Likewise, Li et al. (2022) argue that for a given liquidity, an increase in production will require an increase in trade credit.Kyarikunda (2018) argued that trade credit proved to be a feasible debt financial instrument at the discretion of committed businessmen, which significantly adds to financial performance.Therefore, we propose the following hypothesis: H3: Trade credit has a positive effect on financial performance of SMEs in emerging market.
Based on the foregoing hypotheses, we propose the following research model in Figure 1:

Questionnaire design and measures
Data were gathered using a structured questionnaire with Likert-type responses.A Likert scale ranging from 1 (strongly disagree) to 5 (strongly agree) was used to measure the items for each construct.The item scales used in the study were borrowed from previous related studies (Kinyua, 2013;Kyarikunda, 2018;Mwaniki, 2019;Nazir et al., 2021;Ssentamu, 2016) and modified to suit the requirements of this study.The five sections of the questionnaire comprised the following: demographics, short-term debt (STD), long-term debt (LTD), trade credit (TRC), and financial performance (FIP).
Short-term debt was measured using the frequency of acquiring short-term loans, how easy it is to obtain short-term loans, how restrictive short-term loans are, and the ability of SME to pay short-term debt and short-term debt security requirements.Long-term debt measurement encompasses whether the SME acquires long-term loans to finance its operations, the duration of longterm loans, affordability of long-term loans, level of principal balances of long-term loans, and whether the SME has enough collateral to access long-term loans.Trade credit focuses on its convenience as a form of credit, how it encourages frequent purchases by SMEs, whether acquiring purchases on credit has enabled SME to realize more sales, whether trade credit is considered an expensive source of finance for SME, and whether the overall cost of acquiring goods or services on credit is affordable for SME.Financial performance comprises the following: if there is an increase in the sales value of the SME, if SME has enough cash to meet its obligations effectively as and when they fall, if the profit levels of the SME increase every year, the SME's ability to pay off all its debts and the rate at which the SME is growing.

Sampling and data collection
The study adopted a positivism philosophy as well as quantitative research strategy.In addition, the study follows a cross sectional survey.Data was collected from February 2023 to May 2023.The target population comprised SMEs owners or representatives in Chinhoyi, Zimbabwe.Chinhoyi was chosen because it is an emerging town where most businesses are SME firms (Karedza et al., 2014).Convenience sampling was used to select the sample for this study.A cross-sectional survey of 210 SMEs owners and representatives was conducted.Questionnaires were distributed door-todoor to selected SME owners or representatives within the Chinhoyi urban areas.Of 227 questionnaires, 210 (92.5%) were returned and usable.Table 1 presents the demographic data gathered during this study.
The majority (90.5%) of SMEs owners or representatives in this study were aged between 21-61 and years.Male participants constituted the majority (60%) of the sample, with females constituting 40%.The majority of respondents (61.5%) had businesses that had been in operation for 2-4 years.Most SMEs (50.5%) employed fewer than 20 employees.

Scale validation
Before structural equation modelling was performed in AMOS, scale validation was conducted using exploratory factor analysis (EFA), discriminant validity, and convergent validity.The data analysis was performed using SPSS version 21 and AMOS version 20.The Kaiser-Meyer Olkin (KMO) measure and Bartlett's Test of Sphericity were used to test sample adequacy.The sample satisfied the minimum requirements as recommended (KMO = .620,Approx.Chi-square = 1676.969,Degrees of Freedom = 190, p < 0.001) (Field et al., 2012;Pallant, 2005).Yong and Pearce (2013) recommended that Bartlett's Test of Sphericity should be significant at p < 0.05, whereas the KMO statistic should be at least 0.5.Varimax Rotation was used to conduct factor analysis.The rotation converged in eight iterations, and the total variance explained by the data was 70.841%.Bagozzi and Yi (1988) recommend that acceptable factor loadings should be greater than 0.6.Therefore, LTD2, LTD4, TRC5, FIP3, and FIP4 were the only five items deleted because of factor loadings below 0.6.
Maximum Likelihood Estimation (MLE) was used to estimate the measurement model as recommended by Field (2009).Convergent validity was measured using measurement model fit indices, reliability, standardized factor loadings, critical ratios, and average variance extracted (AVE).The minimum conditions for convergent validity were fulfilled.Thus, the measurement model indicated a good fit (CMIN/DF 2.217, GFI .915,AGFI .963,NFI .954,TLI .916,CFI .928,and RMSEA .068).Reisinger and Mavondo (2007) recommended that a satisfactory model should exhibit a χ2/DF that falls within the scale of 0-5 with lesser values indicating a better fit.Additionally, Hooper et al. (2008) emphasized that the values of NFI, TLI, GFI, AGFI, and CFI specify a good fit when they are closer to 1, and RMSEA must be between 0.05 and 0.10 for it to be satisfactory.2, all constructs had Cronbach's alpha (α) and composite (CRel) reliabilities with a cut-off point of above 0.6 (Leech et al., 2014).Additionally, all items had standardized factor loadings (λ) above the recommended cut-off point of 0.6 (Pallant, 2005).Critical ratios (CRs) were suitably large and significant at p < 0.001.Furthermore, all individual item reliabilities (IIRs) were greater than 0.5, as suggested by Leech et al. (2014).All constructs had averages (AVEs) greater than 0.5 (Fornell & Larcker, 1981).

Discriminant validity
To measure discriminant validity, the AVEs were compared against squared inter-construct correlations (SICCs).Table 3 shows that the minimum conditions to fulfil the requirements were achieved because all AVEs were greater than their corresponding SICCs (Leech et al., 2014).

Research hypotheses tests
The structural equation modelling (SEM) technique in AMOS Version 20 was used to test the hypotheses (H 1 , H 2 and H 3 ).Maximum likelihood estimation (MLE) was used to estimate the structural model (Pallant, 2005).The structural equation modelling technique was adopted because it can determine relationships while simultaneously determining whether there is a general fit between the research model and observed data (Leech et al., 2014).The structural model showed suitable model fit indices (CMIN/DF 2.932,GFI .931,AGFI .938,NFI .937,TLI .918,CFI .973,RMSEA .064).The results of hypothesis testing are presented in Table 4.These results confirm that H 1 , H 2 and H 3 are all supported.This finding confirms that short-term debt, long-term debt, and trade credit have a positive effect on the financial performance of SMEs in emerging markets.

Theoretical implications
Few studies focus on the effect of debt financing on the financial performance of SMEs within the public domain, especially in emerging markets.Therefore, this study was conducted to address this knowledge gap.Therefore, this study contributes to the current body of SME financing by examining the effect of debt financing on financial performance.This study proved that short-term debt positively influences the financial performance of SMEs in emerging markets.Thus, SMEs that use short-term debt can enhance their businesses' financial performance.This implies that if SMEs utilize short-term debt, they are likely to have sufficient working capital to finance the day-to-day operations of their businesses and, hence, improve the financial performance of their businesses.Short-term debt is the best financing tool because it is perceived as cheaper; thus, both entrepreneurs and banks prefer short-term debt (Li et al., 2022).This finding is in line with those of other studies on this phenomenon elsewhere (Altaf & Ahmad, 2019;Dube, 2013;Gibson, 2004;Githaigo & Kabiru, 2015;Jepkorir & Gichure, 2019;Kyarikunda, 2018;Muchugia, 2013;Slav'yuk & Slaviuk, 2019).Likewise, Xu et al. (2021) find that short-term debt is positively correlated with a firm's growth opportunities.This finding offers an important contribution to the current body of SME financing knowledge because, to date, there is a dearth of proof in the public domain of this phenomenon.
Long-term debt was found to positively influence the financial performance in emerging markets.Thus, SMEs that borrow in the form of long-term debt can finance their financial requirements and enhance their financial performance.This implies that SMEs that utilize long-term debt are likely to improve their financial performance as long as the cost of debt does not exceed the required rate of return of the firm.Thus, if SMEs utilize long-term loans, productivity may improve.In practice, long-term investments are supported by the proper utilization of long-term loans to generate sufficient profits to repay loans, cover all costs, and distribute the surplus accordingly (Xu et al., 2021).The findings of this study support the prevailing understanding in the literature that long-term debt positively influences financial performance (Ahmad & Ejaz, 2019;Dube, 2013;Quainoo, 2011;Slav'yuk & Slaviuk, 2019).Similarly, Githaigo and Kabiru (2015) argue that longterm loans may lead to improvements in productivity.Likewise, Peng et al. (2022) argue that SMEs use more long-term debt, expecting that financial performance will improve.
The study further establishes that trade credit positively influences the financial performance of SMEs in emerging markets.Thus, the extent to which SMEs utilize trade credit from suppliers influences their financial performance through access to sufficient working capital to finance dayto-day business operations.This implies that SMEs should focus on trade credit to optimize their financial performance.Trade credit may be necessary when SMEs face cash inflows, which hampers them from purchasing their merchandise on a cash basis and, at the same time, serves as a safety net when suppliers offer discounts for earlier settlement (Cuñat & Garcia-Appendini, 2012;Obuya, 2017).Trade credit, as a spontaneous source of finance, could be cheaper than bank loans (Obuya, 2017).The study findings corroborate existing literature that trade credit positively influences the financial performance of firms (Boissay & Gropp, 2007;Bougheas et al., 2009;Dube, 2013;Kapkiyai & Mugo, 2015;Kyomuhendo, 2014;Slav'yuk & Slaviuk, 2019).Githaigo and Kabiru (2015) found that SMEs should focus on trade credit to optimize their financial performance.Similarly, Ferrando and Mulier (2012) argue that SMEs should rely more on trade credit channels to manage growth.Likewise, Bougheas et al. (2009) argue that for a given liquidity, an increase in production will require an increase in trade credit.Kyarikunda (2018) argued that trade credit proved to be a feasible debt financial instrument at the discretion of committed businessmen, which significantly adds to financial performance.

Practical implications
It is vital for SMEs to understand the factors that positively influence their financial performance.The study recommends that SMEs consider short-term debt a critical and important financial option.This is because short-term debt is considered the best financing tool, as it is perceived to be cheaper.Thus, both entrepreneurs and banks prefer short-term debts.Using a greater proportion of short-term credit to finance working capital may have a positive impact on a firm's performance because short-term credit can easily adjust to a firm's financial needs.
SMEs should also consider utilizing more long-term debt because there is less negative impact on financial performance as long as the cost of debt does not exceed the required rate of return of the firm.SMEs may use more long-term debt if they expect their financial performance to improve.In practice, long-term investments are supported by proper utilization of long-term debt to generate sufficient profits to repay loans, cover all costs, and distribute surplus accordingly.Therefore, in the absence of long-term debt, the business operations of many SMEs can easily be constrained.Long-term loans are preferred sources of debt financing among well-established SMEs because of their asset base and collateral requirements.
SMEs may also focus on trade credit to optimize their financial performance.Trade credit may be necessary when SMEs face cash inflows, which hampers them from purchasing their merchandise on a cash basis and, at the same time, serves as a safety net when suppliers offer discounts for earlier settlement.Trade credit, as a spontaneous source of finance, could be cheaper than bank loans.Trade credit is advantageous to SMEs because of the transaction cost reduction that could have been incurred if payment was to be made instantly on the delivery of goods.SMEs are more likely to be financially constrained; hence, they should consider relying more on the trade credit channel to manage their growth.Therefore, trade credit proved to be a feasible debt financial instrument at the discretion of committed businessmen, which significantly adds to financial performance.Small and young SMEs are more likely to be financially constrained; hence, they rely more on the trade credit channel to manage growth.

Policy recommendations for policy makers
The issue of SMEs funding remains a critical aspect for success of SMEs and the economy at large.Hence, policy makers such as Ministry of Finance, Ministry of Small and Medium Enterprises and other government departments should ensure that policies are put in place so that SMEs are given access to short term and long term debt.Also, policy makers should put in place courses such as financial literacy to assist SMEs in financial matters.Also, policies must be put in place to ensure that SMEs have access to trade credit.

Conclusion
The purpose of the study was to examine the effect of debt financing (short-term debt, long-term debt, and trade credit) on the financial performance of SMEs.The study established that shortterm debt, long-term debt, and trade credit influence the financial performance of SMEs.Therefore, debt financing is one of the critical factors that influence the performance of SMEs.Hence SMEs should consider debt financing to enhance their performance.

Limitations of the study
The study has its own limitations, hence the need for further studies to be conducted.For instance, the study was conducted in one sector and in one country.This makes it difficult to generalise the findings.Therefore, it is recommended that future studies be carried out across other cities in Zimbabwe and other countries.Also, this study employed a quantitative strategy only and only SMEs owners or representatives were respondents of the study.Therefore, it is also recommended that future studies employ a mixed-methods and utilise interviews by interviewing other key informants and employees to get their perceptions.Also, the authors faced several challenges in conducting this research.The first challenge was lack of funding in conducting this research, hence all costs were borne by the researchers.Also, some participants withdrew from participating due to lack of time, since most of them had busy personal schedules.The researchers managed to approach more participants until the targeted sample size was reached.

Further research implications
The study focused only on SMEs hence generalizations of the results may be difficult.These results could be improved by extending future studies to other sectors and towns in Zimbabwe and beyond.Moderating or mediating variables could be incorporated in future studies to enrich the results.