DIRE DAWA RIFT VALLY UNIVERSITY

DEPARTMENT OF ACCOUNTING

PROJECT ASSIGNMENT

PROJECT NAME:
LOANS FOR SMALL BUSINESS

PREPARED BY; ID
DEGDNET SANUEL 109/14

ADISU HABTAMU

HELEN ZEGYE

KASSAYE TERFE

HDWOT WOLKEBA
 ABSTRACT

Financial is a life blood of every business. Availability of finance in business is

a crucial thing for capital investments and working capital to perform their
day to day activities as needed, otherwise it affects the activities of the
business. To have available finance for small business, loans are considered
to be the main source of finance for small business enterprises. Even though
this is the condition there are some factors which affects the sole owner
decision not to use loan as a source of finance.

Therefore, the objective of the study is to assess the contribution of loan on

the activities of small business enterprises of DDMFLA and what factors
affects their decision towards using loan as a source of finance and what
impact this has on their activities.

The significance of the study is to assess the contribution of loans on the

activities of small business enterprise of Dire-Dawa Micro Finance and Loan
Association and what factors affects their decision towards using loans.

The relevance method of data collection for the proposal would be primary
data collection. The primary data would be gathered from the owner of those
who are employed to different types of small business enterprise activities in
Dire-Dawa Micro Finance and Loan Association. A scheduled and observation
method would be selected for the purpose of the proposal.

At the end of the project proposal the contribution of loans for small business
enterprises of Dire-Dawa Micro Finance Loan Association would have been
identified.

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 TABLE OF CONTENT

ABSTRACT.....................................................................................2

CHAPTER ONE................................................................................4

1. INTRODUCTION.........................................................................4

1.1. BACKGROUND OF THE STUDY.......................................................4

1.2. STATEMENT OF THE PROBLEM.......................................................6

1.3. OBJECTIVES OF THE LOANS..........................................................9

1.4. SIGNIFICANCE OF THE PROJECT PROPOSAL......................................10

1.5. SCOPE OF THE PROJECT PROPOSAL...............................................11

1.6. LIMITATION OF THE PROJECT PROPOSAL.........................................12

CHAPTER TWO.............................................................................13

2. METHODOLOGY.......................................................................13

2.1. SITE OF THE STUDY.................................................................13

2.2. SOURCE OF DATA...................................................................13

2.3. METHOD OF DATA COLLECTION..................................................14
2.4. SAMPLE SIZE AND SAMPLING TECHNIQUE......................................15
2.5. METHOD OF DATA ANALYSIS.....................................................16
2.6. METHOD OF PRESENTING THE OUTCOMES.....................................16

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 CHAPTER ONE

1. INTRODUCTION
1.1. Background of the Study
According to Bulton (1971) small business are described as it is one that has
relatively small shares of markets and is managed by its owners or part
owners in personalized way and not through the medium of the formalized
management structure. Moreover, it’s independent in the sense that it does
not form parts of a large enterprise and the owner (manage) should be free
from outside control in taking their principal decisions.

A broad definition of small business drown up by the department of

commerce identifies it as any management plan that employees hundred
percent (100%) or fewer whole sellers establishment with annual sales of
less than Birr two hundred thousand (200,000) or other business with sales
and receipt of less than birr fifty thousand (50,000) a year (by small business
administration).

The small business plays a great role in any sociality as they involved as in
the provision of goods and services that would address the needs of few
people that generally go unnoticed by large business or which are
unprofitable for large firms.

The owner has strong influence on the firm. Their views and values will
influence all aspects of activities. This means that business decisions will
often become personal decision and the logic of balance sheet will not play.
There is also the risk over dependency upon the on the individual for the
well-being of the firm.

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Most small business is unlikely to be able to exert much influence on their
market. They are price taker in the classic economic sense and are likely to
face significant competitive strategy is of permanent importance.

Small businesses are not public companies. This means they often have a
problem of raising capital and this can significantly constraint their choice of
strategies for many small business seeking to grow raising finance can
become a major strategic issue and relationship with financing institution
such as banks can become major resource issued.

Every business needs money for capital investment and to provide working
capital. Some people have enough to invest everything by themselves that
the business requires others having noting and except to borrow everything,
some recognize the need to raise equity from the third parties. Banks are
cautious and want to lend as little as possible and expect to see modest level
of gearing. Money from different source has different cost partly reflecting
the different risk. So, deciding best source and achieving a reasonable
balance between different sources of finance is crucial.

Most business relies largely on loan finance, obtaining loans from the major
banks. As commercial lender, banks are concerned with getting a good
return on their investment and do not want to lose their investment. Banks
are increasingly responsible to the needs of small business but, there is
many occasions when the risk of lending is considered too high. This is
usually because the business is being started by someone with little previous
business experience and not much of their own capital to invest and there is
in sufficient security.

Small business often needs other sources of financial help if they are to grow
and to develop. Financial assistance and advice to small business is available
all over the country especially the areas of high an employment and
economic deprivation. Funds may come from the government (national and
local level) and from a number of organizations such as local enterprise

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agencies. Banks are more likely to help small business as they are receiving
supports and advice from these agencies.

Financial assistance especially for businesses startups is often associated

with business skills course under taking business training not only improve
personal skills but will increase the confidence of potential investors or in the
business.

In the content of financial need a small business enterprise is on enterprise

with special problem at all at stage in its development. That means at start
ups early growth and expansion.

1.2. Statement of the problem

Small business enterprises are occurred in every country in order to

contribute to the nation’s economic welfare. They make exceptional
contributions as they provide new jobs introduce innovations, and stimulate
competitions and the like. These small businesses face some difficulties or
problems mostly in relation to financial in the process of their operations.

According to Bulton report (1971) some difficulties that the small businesses
faces in relation to financial problem are: Management may be
inexperienced and have little knowledge of source of finance, they may have
little or not past business record on which the base on application for
finance, source of capital are fewer because some institutions will deal only
with larger firm, lenders are reluctant to lend to firms with obvious
management succession plans and where risk of insolvency greater because
of their small. So, the small business of our world faces the above mentioned
problems at large. Since, our continent Africa is poor, the small businesses
enterprises of this content faces many problems as compared to those
developed countries. Especially, in our country the small businesses have a
number of problems such as financial, risk, lack of access to finance,
management incompetence and the like.

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The project proposal was limited to loan as a source of finance for small
business enterprises in eastern Ethiopia particularly in Dire Dawa town. This
proposal also focus on limited area of small businesses which have the
characteristics of small in size, limited market share and owned by
individuals.

To have available finance in businesses, loans are considered to be the main

source of finance for small business enterprises. If the business concern
having the sufficient amount of capitals, then they can freely involves in the
business activities. Otherwise it affects their activity.

Even though, using loan as a source of finance was preferable, there were
some factors which could affects the small business enterprises of Dire Dawa
town not to use loan as a source of finance. These factors were listed below
with their respective causes:

- Unavailability of loan on time- This may be caused by lenders reluctant

to lend their money and borrowers little awareness towards asking
loans.
- Accessibility- may cause by if the financial providers are not accessible
(not found near to them).
- Risk- caused by in ability of paying back the principal and interest on
the amount borrowed due to different reasons like theft, damage and
fluctuation of prices.
- Lack of little knowledge about source of finance- It may be caused by
the management (owner) of the business may be inexperienced or in
competent and have no knowledge about source of finance.
- Lack of assets used as collateral- It may be caused by because of their
being small

The above raised problems have their own effects on the activities of small
business enterprise of dire Dawa town. These problems make them not to

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have enough working capital like inventory in their stores to meet the
demand of their customers which increases profitability.

The reason for doing this study would be to identify what factors affects the
decision of small business enterprises in Dire Dawa town towards using loans
as a source of finance and to give possible solutions or recommendations for
the raised problems.

The main purpose of this research is to answer the following basic questions.

1. What is the contribution of loan on the activities of small business

enterprises?
2. What are factors that affect the decision of small business enterprises
not to use loan as a source of finance?
3. What are the attitudes of small business enterprises towards using
loan as a source of finance?
4. What is the financial capacity of small business enterprises to run their
activities?

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1.3. Objectives of the loans

General objective

To assess the contribution of loans on the activities of small business

enterprises in Dire Dawa town and what factors affects these small business
enterprises not to use loan as a source of finance and what impact this has
on the activities of them.

Specific objective

1. To assess the contributions of loan and what impact it has on the the
activities of small business in Dire Dawa town.
2. To identify what factors affect decision of small business enterprise not
to use loan as a source of finance under the plan.
3. To assess the financial capacity to run their activities and capital
seeking power of the small businesses of Dire Dawa town.
4. The study the interest of small business enterprises of Dire Dawa town
toward having loans.
5. To provide suggested solutions or recommendations to overcome the
identified problems.

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1.4. Significance of the project proposal

The study was conducted to assess the contribution of loans on the activities
of small business enterprises of Dire Dawa town and what factors affects
their decisions towards using loans.

 The study is expected to provide a base line information concerning

the problems faced by the small businesses.
 It enables the government and concerned body to identify suitable
loan types and makes the condition of Pettis by such business smooth
by providing suitable financial institutions for them by considering their
size to increase number of employment and quality of their life.
 It provides information about those factors that affect the small
business enterprise while they are running their business.
 It also provides information about what contribution is obtained by the
small business enterprise if they become the users of loan as a source
of finance.
 It provides information to the lenders institutions to prove their interest
rate charged on the available found lending conditions in order to
provide their services properly and to meet customers need.
 It provides suggested solution or recommendation for the problems
which are faced by the small businesses.

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1.5. Scope of the project proposal

The scope of the study would limit to loan as a source of finance for small
business enterprises in Oromia region particularly in Dire Dawa town.

This study also focused on limited area of small business, which has the
following characteristics.

 Small in size
 Limited market share
 Managed and owned by individual owners.

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1.6. Limitation of the project proposal

The sample size taken is not enough to reach up on maximum expected

conclusion due to cost constraint and limited time given during data
collection.

The researcher faced difficulties with regard to the collection of data from
secondary sources and even the data obtained with this respect is not
sufficient for the completion of the paper.

There was subjectivity from the respondents during collection of primary

data. That means the researcher would face the problem with regard to the
response gate from the respondent during data collections.

Due to constraint of time and finance the study could not be conducted in as
many small businesses as possible, so that the study would focused on few
selected individuals in the town.

Since the study is limited only on Dire Dawa town, it is difficult to make
general conclusion about the contribution of loan for small business
enterprises and what factors affects them not use loan as source of finance.

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 CHAPTER TWO

2. METHODOLOGY

Methodology refers to the overall approach to the project proposal from the
theoretical collection and analysis of data from primary sources.

2.1. Site of the study

This research will be conducted in Eastern Ethiopia particularly in Dire-dawa

town. The study is aimed to assess the contributions of loan and what factors
affect the small business enterprise towards to using loan as a source of
finance and what impact it has on the activities of them. To perform this
study appreciates material and methodologies will be need

2.2. Source of Data

Materials are data that is useful for conducting research. These data will be
collected from primary source to carry out the research effectively. The
primary data was used widely for this study because there was no enough
documented information’s about the small business enterprise study which is
called primary data.

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 2.3. Method of Data Collection

This refers various means by which data can be collected. The most widely
used to conduct this study will be primary data would also used. The source
of the primary data used for the study will be the owners of the small
business of DDT. To collect this primary data for the purpose of the study,
two types of data collection methods is used. These are scheduled and
observed methods. Even though using this method for data collection is
expensive, its preferred because the target population for the study is
somewhat illiterate and the choose enumerators helps the target group by
avoiding some difficulties they may face in undertaking question and
concept by explaining them about the investigation and also have an
advantage of providing fairly reliable results.

Schedule creates direct communication between the researcher and the

respondents and therefore, enables the researcher to come up with more
qualitative information. Personal observation of the setup of the business
was used to supplement the researcher’s effort to drive logical conclusions
from the result of analysis. Unstructured interview will used to gather
information to test aware of the problems of small business.

A questioner in English was prepared which formed the basis of interview

during data collection. The form of the questioner would the structured one
that is definite, concentrate and predetermined question. These questions
are presented as both closed (yes or no) and open ended question.

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 2.4. Sample Size and Sampling Technique

The main source of population for the study are those who are employed to
the different types of activities of small business enterprise are not
homogenous, it’s important to sub-group (divided) the target population
according to their homogeneity. A sample of 60 persons was taken
randomly through questioner and direct interview.

Even though, there are many sub-group of small business activities are
found there the study is concentrated on three sub-group of the business
due to its impossibility to concentrate on all types of the business activities
for time and capital limit. According to this, the three stratums (Sub-groups)
are:

1. Those who are employed to shop keeper (retailer of merchandise)

2. Those who are employed to small scale industries
3. Those who are employed to grain sellers

The above mentioned small businesses represent the major small businesses
in the town. These small businesses are not homogenous in their operational
activities.

The probability sampling technique was used for the study. Because it gives
a known none zero probability of selection for target population. From the
probability technique, stratified sampling technique is selected. It’s preferred
because of the population from which the sample is drawn does not
constitute homogenous population and this method helps to obtain
representative sample from each sub-groups or strata. Each business
sector was stratified in to homogenous groups based on the similarity of the
businesses from which samples was randomly selected. The stratum was
enumerated and owners would be selected randomly from the complete list
of stratum.

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 2.5. Method of Data Analysis

After the data are collected from the respondents or after field work is
complete the data are edited. To identify the necessary data from
unnecessary one data was coded, processed and analyzed. The data from
the questioner would be manually stored out and at the same time,
information would be checked for completeness in the variables under the
study. This involves data processing which includes editing and classifying
collected raw data.

The objective of data collection processing and analysis is the reach at

specific conclusion through the task of drawing inferences from the analyzed
facts. This data analysis makes the row data to be understandable and
interpretable for the purpose this study, the data was analyzed by using
tabulation computation of percentage and pie charts data analysis
techniques.

2.6. Method of Presenting the Outcomes

After the data was effectively processed and analyzed the analyzed facts
was thoroughly presented. In the course of presentation inferences would be
drown. The original presentation was approved by advisor before going for
the final report. Representation would be considered on critics of the advisor
on the original presentation to avoid miss presentation which results in
wrong conclusions. In the process of presentation reasonable explanation of
the relations and lines of the relation would be given.

At the last the final report which includes tables, pie charts and bar graphs
that provided supportive figures and written.

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