IMPACT OF DEBT FINANCING ON THE GROWTH MANUFACTURING FIRMS IN NIGERIA
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IMPACT OF DEBT FINANCING ON THE GROWTH MANUFACTURING FIRMS IN NIGERIA
INTRODUCTION TO CHAPTER ONE OF THE IMPACT OF DEBT FINANCING ON THE GROWTH OF MANUFACTURING FIRMS IN NIGERIA
1.1 BACKGROUND OF THE STUDY
Manufacturing enterprises are valued in both developed and developing countries. They manufacture items and provide services that contribute significantly to economic growth and job creation.
Despite the fact that they play an important role in economic growth and employment, their activities are frequently hampered by a lack of suitable financing from financial institutions.
The primary goal of this study is to investigate the impact of debt financing on the growth of manufacturing enterprises in Nigeria.
A manufacturing company can finance its operations with either equity or debt. Debtfinancing is the borrowing of money from a lender at a fixed interest rate and with a set maturity date. The principle must be repaid in full by the maturity date, however recurring principal repayments may be part of the loan agreement.
Debt can take the form of a loan or the sale of bonds; the form does not change the concept of the transaction: the lender retains a right to the money lent and may seek repayment under the terms of the borrowing arrangement.
Lending to a manufacturing firm is thus, in theory, safer, but the amount the lender may recover is limited to the principal and the interest charged. money is riskier, but if the manufacturing company is very successful, the investor’s upside potential may be quite appealing;
the negative is entire loss of money. Manufacturing companies can acquire debt funding from a variety of sources. Friends and family, banks, credit unions, consumer finance firms,
business finance companies, trade credit, insurance companies, factor companies, and leasing companies are all private sources of debt financing.
A number of credit programmes offered by state and federal governments to assist manufacturing enterprises are examples of public sources of debt financing.
Manufacturing companies require finance to operate. Internal cash, debt, and stock can all be used to fund their activities. Borrowing from financial institutions is used to fund debt financing. A great deal of study has been conducted on the impact of debt financing on firm growth.
The findings of these investigations are contradictory. Cecchetti et al. (2011) investigated the impact of debt on firms and concluded that a moderate amount of debt improves welfare and increases growth, whereas a high level can lead to a fall in company growth.
Rainhart and Rogoff (2009) contended that debt has a favourable impact on firm growth only when it is kept within specific limits. When the ratio exceeds certain thresholds, a financial crisis is quite likely.
Stern Stewart and Company also supports the concept, claiming that a high level of debt increases the likelihood of a corporation experiencing financial difficulties.
Borrowing too much can result in bankruptcy and financial devastation (Ceccetti et al., 2011). Because of the inability to obtain more debt from financial institutions, high levels of debt will prevent the firm from embarking on projects that are likely to be lucrative.
The form of debt is a significant factor of a manufacturing firm’s growth. According to Jaramillo and Schiantarelli (1996), the availability of long-term credit enables industrial enterprises to boost their efficiency. If a company has access to long-term debt financing,
it can invest in new capital and equipment, increasing productivity. According to Marcouse (2003), increasing production per worker by investing in more contemporary and sophisticated machines. According to Ventire et al. (2004), current know-how fuels better production per unit of effort.
The manufacturing company can also invest in more productive new technologies. Inability to obtain long-term financing may lead manufacturers to employ short-term debt to fund long-term projects.
This causes asset and liability mismatches and depletes working capital. Working capital depletion will have a detrimental impact on firm operations. It is critical that the project’s cash flows serve as the principal source of loan repayments.
1.2 STATEMENT OF THE PROBLEM
A manufacturing firm’s ability to run efficiently in production is required for the firm to grow. This is possible if the company has the finances to invest in productive new technology. Internal funds, debt, or stock can all be used to invest in a manufacturing firm.
Nigerian industrial enterprises emerged from a severe economic crisis that left infrastructure in disrepair. Massive investments in machinery and cutting-edge technology are required to boost manufacturing enterprises’ operations.
Despite financial institutions’ support, many manufacturing enterprises are closing their doors. However, the examiner wishes to investigate the influence of loan financing on the expansion of Nigerian manufacturing enterprises.
1.3 OBJECTIVES OF THE STUDY
The following are the study’s objectives:
1. To investigate the influence of debt financing on the growth of Nigerian manufacturing enterprises.
2. To identify the sources of finance for Nigerian manufacturing enterprises.
3. Determine the rate of growth in Nigerian manufacturing enterprises.
1.4 RESEARCH QUESTIONS
1. What effect does debt financing have on the expansion of Nigerian manufacturing firms?
2. What are the sources of finance for Nigerian manufacturing firms?
3. What is the rate of expansion in Nigerian manufacturing firms?
1.5 HYPOTHESIS
HO: Debt financing has no effect on the expansion of Nigerian manufacturing enterprises.
HA: Debt finance has an impact on the expansion of Nigerian manufacturing enterprises.
1.6 SIGNIFICANCE OF THE STUDY
The following are the study’s implications:
1. The findings of this study would be a beneficial reference for Nigerian manufacturing companies on debt management, based on the information collected from the relationship between debt financing and the growth of Nigerian manufacturing companies.
2. This research will also serve as a resource base for other academics and researchers interested in conducting additional research in this sector in the future, and if implemented, will go so far as to provide new explanations for the topic.
1.7 SCOPE AND LIMITATIONS OF STUDY
This study on the impact of debt financing on the expansion of Nigerian manufacturing enterprises will cover all sources of finances, such as loans to Nigerian manufacturing firms. It will also discuss the impact of debt financing on the profitability of Nigerian manufacturing enterprises.
STUDY LIMITATIONS
Financial constraint- A lack of funds tends to restrict the researcher’s efficiency in locating relevant materials, literature, or information, as well as in the data collection procedure (internet, questionnaire, and interview).
Time constraint- The researcher will conduct this investigation alongside other academic activities. As a result, the amount of time spent on research will be reduced.
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