Professional Documents
Culture Documents
Research Proposal
Research Proposal
Submitted to:
Alexander Villaluz, LPT, ToCarm
May 18 2019
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
Chapter 1
This chapter includes the introduction, theoretical framework, statement of the problem,
hypothesis, scope and limitation, conceptual framework, significance of the study and the
definition of terms used.
1.1 Introduction
Debt is a financial obligation by one party from another. It is used by many corporation,
entrepreneur and even individuals as a method to acquire large amount of products that they
could not afford. Debt arrangement gives an opportunity to one party to borrow money under the
condition that it is to be paid back at a later date, and usually has an interest. One of the common
forms of debt is loans, it is used by entrepreneur to start their business. The borrower is required
to repay the balance of the loan by a certain date. The amount of interest is depend on the term
used if it is paid annually or monthly. In order to limit the interest expense the entrepreneur or
the borrower must repay the loan quickly.
Debt management help company, entrepreneur and individual to control their debt. Debt
is quite stressful and it can lead to serious problem like health problem and even death. The
company or entrepreneur must know how to handle debt for the better result of their business.
Company that experience bankruptcy experience loss in their business due to payment of loan
and its interest. The debtor must know when to pay their debt and how debt affect their business.
The short term payment of loan the lower interest that the company may pay. But long term
payment of loan leads to higher interest expense. The debt management help the entrepreneur to
settle their debt properly, entrepreneur who manage loan properly will not experience bankruptcy
or loss.
Malolos City is one of the industrialized city and province many entrepreneur put up their
business especially in food industry. Around Malolos City Capitol there is a lot of restaurant, fast
food chain and even street vendors who sell street foods. Street foods are one of the popular,
many student and individual patronized it because of cheap price. Due to high demand of street
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
foods, vendors need to purchase large amount of their product to meet the demand of their
customer. But the problem is the vendor doesn’t have sufficient money to acquire large amount
of product so they borrow money from a creditor and pay it within the agreement of vendor and
creditor.
management in the business (J. Fred Weston). Under this theory it explained the importance of
debt management and the effect of financial obligation to the business. This theory explain that
the longer time maturity of debt the bigger interest expense will be paid. Using this theory, the
researcher can assume that every business need to know how to manage their finances specially
their debt. This theory can help the researcher to align their focus on the factors that stated
above, in such way, they can tackle the problem more easily using the theory as their guide in
formulating their question and assumptions.
2.4 Assumptions
Insufficient accounting practices, unrealistic budgeting and pricing, and low sales over
high expenses are the possible factors that urge the growth of the debt of a micro-scale
entrepreneurs.
Micro-entrepreneurs use money from loans to serve as their capital in every time they
faces under comings with their expenses and insufficiency with their net income.
Micro-entrepreneurs must not create more debt, must manage their expenses to eliminate
and reduce the higher possibility of debt growth and should communicate with the
creditors for smaller interest rate.
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
CHAPTER 2
This chapter presents the related literature and studies after the thorough and in-depth
search done by the researchers. This will also present the synthesis of the art, theoretical and
conceptual framework to fully understand the research to be done and lastly the definition
of terms for better comprehension of the study.
Despite MSEs having advance defined optimal capital structures; there are some
constraints that hinder them to get there, such as dearer transaction costs and
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
negligence on the side of the managers to implement the capital structure as advocated
by static tradeoff theory (Shyam-Sunder & Myers, 1999; López-Gracia & Sogorb-
Mira, 2008).
If the relationship between profitability and leverage is negative, then such a
relationship defeats the static tradeoff theory argument of equating cost of debt to
benefits of using it, such as tax advantage at the corporate level is cancelled by tax
disadvantage at the personal level (Fama & French, 2002; Heshemi, 2013). The static
tradeoff theory is also criticized because the corporate tax gain championed by tradeoff
model is insignificant compared with financial distress cost (Miller, 1977).
Debt as a Source of Capital. While you may have cash for operations, your
financial position looks no better and you likely won’t qualify to assume other loans or
debt. This is a critical distinction to Hodgson. Having the cash you need for today’s
operations doesn’t help you secure the financing you need for tomorrow’s operations. I
don’t know any entrepreneur in business to run a revenue flat operation they want to
grow. It takes capital to grow and so a funding solution that only enables you to acquire
the capital you need to stay where you are today is not a growth solution. M. Vetter.
(2016)
Savings and loans from relatives are the major sources of the business capital with
micro-credit coming in the second place. The earnings from existing business were
mostly used to meet family expenditures. The results also show that Mental Budgeting
(MB) and its determinants like other sources of income over existing business, never
spending more than a fixed amount, having an overview of checking balance, long-term
future orientation and financial product knowledge have significant influences on the
financial management of SMEs.
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
Ways to Reduce Small Business Debt. Communicate with Creditors and Lenders
Communicate with creditors and lenders. If you find yourself falling behind on
payments, prioritize debt payments to determine which creditors and suppliers must be
paid first. Your cash flow statement should be particularly helpful for identifying
delinquent accounts and missed payments. Once you’ve figured out the amount of money
you can allocate towards outstanding debts, contact creditors to see if they’re open to
arranging agreeable payment terms. Ask your lenders about available loan-consolidation
programs, which can group multiple loans into a single monthly payment. (B. Austin.
2019)
Save the business. Obviously, the first option in trying to save a business while
managing its debt is taking money out of your own pocket and putting it into your
business. This is a calculated risk that probably has failed as many times as it has
succeeded, and should only be done if you can justify it as a short-term tactic that
promises the likelihood of a long-term payoff. (B. Fayy. 2019)
Joint Effects of Debt Financing Option, Risk and Age of Business on Financial
Performance
The major emphasis on theoretical relationship between debt financing option and
financial performance is the cost of debt implication and the benefit derived thereafter
from its use (Heshemi, 2013). The static tradeoff theory emphasizes on the cost/benefit of
debt, where the benefits should overweigh its cost so that the revenue generated must be
adequate to cover the operational cost, pay interest on debt itself and meet the business
owners’ investment returns (Heshemi, 2013). Interest on debt is tax deductible resulting
in tax savings that contribute to higher profitability, indicating a clear theoretical
relationship between debt financing option and financial performance (Modigliani &
Miller 1963). Therefore, accordingly, debt usage is advantageous because of tax
deductibility of its interest on income to arrive at net taxable income, its low-cost nature
and facilitation of planning because its interest cost is fixed and known in advance,
resulting in better returns to the business owners (Damodran, 1999; Bernstein, 1999)
According to the study of Obuya, David (2017), trade credit is linked with firms’
liquidation and default payment hence has a negative effect on financial performance.
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
The study shows that there is a negative relationship between short term loans on
enterprise financial performance measured by return on assets. If enterprises depend more
on long-term debt, they are likely to increase their cost of capital and finally collapse.
Total debt is a predictor of non-performance on MSEs because it impacts negatively both
on return on assets and gross profit margin.
On the other hand, Trade credit decreases costs of transactions. Enterprises that
increase short-term loan hold more cash that improves their cash flows. Long-term loan
has a positive effect on financial performance, measured by return on asset. Total debt
has a positive effect on financial performance measured by gross profit margin. The study
concludes that Micro and Small Enterprises should finance their operations with trade
credit and long-term loan and ensure proper utilization of external finances.
Small and Micro Enterprise Owners’ Characteristics and their Impact on Capital
Structure
According to the study of Kapkiyai, C. & Kimitei, E. (2016), overconfidence has
a significant effect on capital structure. There is need for SME owners to avoid being
overconfident in order for entrepreneurs to assume unnecessary risks that threaten the
survival of their firms. Hence, there is need for SME owners’ to be confident of
confronting obstacles especially in times of crisis and when venturing in business
activities whose outcomes are uncertain.
other financial services. The study also found out that micro entrepreneurs in general are
not practicing a good record keeping. They are also prone into ridding indebtedness since
these micro entrepreneurs were recording their business transactions in a notebook
without proper accounting format.
The results indicated that most of the micro enterprises’ owners do not engage in
formal financial planning, budgeting and control and only keep some books of
account. Most of the respondents understand commercial banks as a source of finance
but do not understand the sources of equity finance and the requirements to obtain a
loan. The results suggest a low level of financial literacy by the owners of new micro
enterprises.
The Role of Micro Finance in the Growth of Small and Medium Size Industries
Joint Effect of Debt Financing Option, Risk and Age of Business on Financial
Performance
Unlike risk which has a definite negative relationship with financial performance,
debt financing option and business age have mixed effects on financial performance
(Saunders & Cornett, 2006; Matarirano, 2007; Agarwal & Gort, 2002; Sorensen & Stuart,
2000; Liargovas & Skandalis, 2008). Financial performance when measured by gross
profit margin, return on assets and current ratio depicts positive relationship with
moderate debt financing usage (Abor, 2005; Modigliani & Miller, 1963; Cecchetti,
Mohanty, &Zampolly, 2011; Rainhart&Rogoff, 2009). However, in certain cases, when
excess debt financing is used, ceteris paribus,financial performance indicates negative
relationship with debt financing option that may, to a certain extent induce bankruptcy
cost (Al-Timimi&Alsaadi,2014; Cecchetti, Mohanty, & Zampolly, 2011). As mentioned
earlier, financial performance measured by gross profit margin has insignificant
relationship with debt financing (Ebaid, 2013).
The literature on small firms’ financial management is very broad and it draws upon
different aspects of firm’s life. The initial interest of research in SMEs bankruptcies and default
risk has widen to studies investigating capital budgeting, development and growth models of
small business and relationship between default behaviors of SMEs and the credit facets of their
owners. Another interesting point of investigation were the financing patterns and capital
structure and working capital management. Myers (2001) argues that capital structure theory
choice is not standardized. However the best combination of equity and debt known as optimal
capital structure is the one that minimizes the financing cost, and maximizes the value to the
firms by giving the best balance between tax benefits and distress cost (Roshanak Heshemi,
2013; Bradley, Jarrel, & Kim, 1984). The static Tradeoff Theory equates the benefits and the
cost of using debt where the optimal capital structure occurs when the benefit and cost are
optimal (Heshemi, 2013). Myers and Majluf (1984) developed the pecking order theory which
suggests that firms have a particular preference order for raising capital.
La Consolacion University Philippines
City of Malolos, Bulacan
College Department
(A.Y. 2018-2019)
CHAPTER 3