Background of The Study

Background of the Study
Small and medium-sized enterprises (SMEs) are a key source of livelihood in many local
communities like Lemery, Batangas. These enterprises play a crucial role in economic
development by providing jobs, fostering innovation, and stimulating local economies. However,
one of the biggest challenges they face is limited access to financing. Without sufficient funding,
many SMEs struggle to secure loans from banks and other financial institutions, making it difficult
for them to start, innovate, expand, and thrive in the competitive market. This financial constraint
not only limits their growth potential but also affects their ability to sustain operations during
economic downturns. Githaiga and Kabiru (2015) argue that SMEs often rely on debt financing to
fund their business operations due to limited access to other forms of capital. They emphasize that
understanding the impact of debt financing on SMEs' financial performance is crucial for
developing strategies to support their growth and sustainability. Effective debt financing can
provide SMEs with the necessary capital to invest in new opportunities, manage cash flow, and
enhance their competitiveness. However, the high cost of borrowing and stringent lending
requirements can pose significant barriers to accessing debt financing.
According to Aldaba (2012), small and medium-sized enterprises (SMEs) are essential
engines of economic growth, job creation, and innovation worldwide. These businesses play a
critical role in fostering entrepreneurship and stimulating local economies, contributing significantly
to a country's economic development (OECD, 2020). Lemery, Batangas, has earned recognition
for its economic vibrancy, with a multitude of active establishments driving employment generation
and overall economic development. The municipality is ranked 230th in economic dynamism,
reflecting its progress and potential for further growth and prosperity (Cities and Municipalities
Competitiveness Index, 2024). The ongoing support and development of SMEs are crucial for
maintaining this positive trajectory and ensuring sustainable economic success in the region.
However, despite the economic vibrancy of Lemery, Batangas, many SMEs in the area struggle
with accessing formal debt financing.
A significant portion of these businesses rely on informal loans, which often come with higher
interest rates and less favorable terms. This financial constraint hinders their ability to invest in
growth opportunities and improve their financial performance. Enhancing financial inclusion for
SMEs can promote inclusive growth, increase employability, and stimulate economic development.
Tailored financial services and supportive financial policies are crucial to overcoming financial
constraints and harnessing the potential for job-rich growth (Brixiová, Kangoye, & Yogo, 2020).
However, understanding the specific effects of debt financing on the financial performance of
SMEs in Lemery is crucial. Manyanga et al. (2023) assert that debt financing positively influences
financial performance in emerging markets, which underscores the importance of leveraging debt
to enhance financial health and drive growth. Access to various formal debt financing options is
crucial for managing financial needs and boosting performance.
The incorporation of debt financing is crucial for addressing financial needs and enhancing
performance. Debt financing allows businesses to secure the necessary funds to invest in growth
opportunities, manage cash flow, and improve overall financial health. Studies have shown that
relaxing financial constraints positively impacts SMEs' employment growth, with larger loans and
those with smaller collateral requirements and longer maturities significantly boosting job creation
(Dao and Liu, 2017). In Lemery, Batangas, the benefits of debt financing are especially significant
due to the area's economic vibrancy and the essential role of SMEs in driving local economic
development. However, many SMEs in Lemery struggle to access formal financing due to high
collateral requirements, interest rates, and limited financial literacy, often forcing them to rely on
more expensive and less reliable informal loans. Understanding the specific effects of debt
financing on the financial performance of SMEs in Lemery is crucial. It provides insights into
current financial challenges, highlights the importance of financial education, and informs
policymakers about barriers preventing SMEs from accessing formal financing. Through effective
debt financing strategies, SMEs in Lemery can achieve financial stability, drive job creation, and
contribute more significantly to the local economy's growth and development. This understanding
can also help in developing tailored financial products and services that meet the unique needs of
SMEs in Lemery, ultimately supporting their long-term growth and sustainability.

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