Business Licensing and Financial Performance of Small and Medium Enterprises in the Manufacturing Sector in Bungoma County, Kenya

Small and Medium-Sized Enterprises (SMEs) play a pivotal role in Kenya's economic growth; however, their financial performance is often constrained by regulatory complexities, particularly in business licensing requirements. This study examined the effect of business licensing on the financial performance of manufacturing SMEs in Bungoma County. Guided by Institutional Theory, the research analyzed how licensing functions as a mechanism for legitimacy, compliance, and access to financial resources. A descriptive research design was employed, targeting 2,581 SMEs, from which a sample of 346 respondents was selected using Yamane's formula and simple random sampling. Data were collected through structured questionnaires and analyzed using descriptive and inferential statistics, including linear regression. The descriptive results revealed that while SMEs generally perceive licensing costs and timelines as affordable and adequate, challenges remain in terms of procedural clarity, inter-agency coordination, and digital platform efficiency. Inferential findings showed a strong positive relationship between business licensing and financial performance, with regression analysis indicating that licensing explained 74.3% of the variability in return on assets (R² = 0.743, p < 0.05). Regression coefficients confirm a positive and significant effect of business licensing, citing that a change of one unit in business licensing costs a 0.301 change in financial performance. The study concludes that streamlined, transparent, and digitized licensing frameworks significantly enhance SME legitimacy and financial outcomes. It recommends that county governments simplify licensing processes, integrate e-governance platforms, and incentivize formalization by linking licensing to access to finance, procurement, and capacity-building programs.