The Impact of Access to Finance on the Growth and Performance of Small and Medium Enterprises: Evidence from Addis Ababa, Ethiopia

Abstract Small and Medium Enterprises (SMEs) are crucial drivers of economic growth, employment generation, and innovation in Ethiopia, yet their development is frequently constrained by limited access to finance. Many SMEs encounter challenges such as high collateral requirements, inadequate financial documentation, complex bureaucratic procedures, high interest rates, and limited managerial capacity, which restrict their ability to secure formal loans and expand operations. The primary objective of this study was to examine the impact of access to finance on SME growth and performance in Addis Ababa, focusing on both firm-specific factors including firm age, owner/manager education, record keeping, and attitude towards loan financing and financial environment factors, such as collateral requirements, interest rates, and documentation procedures. To achieve this, a cross-sectional explanatory research design was adopted, and primary data were collected from 368 SMEs in the manufacturing, trade, and construction sectors using structured questionnaires administered to owners and managers. Data were analyzed through descriptive statistics, correlation analysis, and multiple linear regression to determine the significance and direction of relationships between independent variables and SME growth and performance. The findings indicate that firm age, proper record keeping and financial documentation, owner/manager education, and positive attitudes towards loan financing significantly enhance SME growth and performance, while high collateral requirements have a significant negative effect. Other variables, including firm relationship with credit providers, interest rates, and documentation bureaucracy, were statistically insignificant. Based on these results, the study recommends improving managerial education and training, promoting proper financial record-keeping practices, cultivating positive attitudes toward borrowing, and designing flexible lending policies that reduce collateral constraints. These measures can improve SME access to finance, foster sustainable growth, strengthen competitiveness, and contribute to broader economic development in Addis Ababa and across Ethiopia.