Small-scale businesses play an important role in the global economy with over 60% of the population depending on them for employment. About 30% of the population in Kenya depends on Small-scale businesses for their livelihoods. However, up to 70% of the businesses are collapsing under the burden of unserviced loans. In Homa Bay town, 60% of the non-performing loans portfolio among commercial banks is from small-scale businesses, suggesting poor borrowing behaviour. While prior studies indicate that financial literacy generally influences borrowing behaviour, there is no clear link between financial literacy and borrowing behavior of small-scale business owners, particularly in Homa-bay town. On this basis, the study sought to establish the relationship between financial literacy and borrowing behavior among the small business owners. It was guided by correlational research design and anchored on the theory of Reasoned Action and the theory of Planned Behaviour. Out of 1220 business, a sample of 301 small scale business owners was taken. Stratified random sampling technique was used to draw individual respondents.   Primary data were collected using questionnaires while secondary data were from the business records. Reliability coefficient for the questionnaires was 0.815 and content validity index was 0.723. Peason correlation and multiple regression were used to establish the relationship. The study revealed that 65% and 49.8% changes in the borrowing behaviour were associated with the business owners’ knowledge of key money concepts and knowledge on the financial institutions respectively. The estimated model could explain up to 59.6% variations in the borrowing behaviour of the business owners. The study concludes that borrowing behavior of the small-scale business owner is significantly related to the owner’s financial literacy. It is recommended that the small-scale business owners be educated more on financial matters, particularly the key money concepts and the existing financial institutions. Findings from the study may benefit both the borrowers and lenders in financial planning. Researchers may also use the findings as a source of literature for further research in the field of study.

KEY WORDS: Financial literacy, Borrowing behaviour, Small-scale businesses, Kenya