Can deadlines and just-in-time information motivate small business owners to complete loan applications?

Background

Small businesses need access to credit, but many banks will not provide business loans to owners who have less than two years of business history or who have low (or no) credit scores. Facing limited access to capital, many small businesses turn to one of an increasing number of “alternative” lending options. The problem is many of these options are unregulated and offer predatory lending options – the Opportunity Fund estimated that “alternative” business loans had an average annual percentage rate (APR) as high as 94%, and many had even higher rates.

To help these small business owners, we partnered with Accion, a fair and flexible lender with approximately 6,000 active borrowers. Accion also facilitates connections to business experts and access to resources and opportunities tailored to each business owner’s unique needs and goals.

Key Insights

To better understand the process, we reviewed and analyzed Accion’s application data and applicant funnel. We also interviewed over 20 people, including applicants, borrowers, employees, and vendors across four regional offices.

This analysis led us to a couple of key insights:

• There is a high drop-off rate in the document collection phase. Before Accion grants a loan, they request some background information and documents, such as bank statements, business plans, or a profit-and-loss statement. Gathering these documents may be cumbersome or overwhelming. Approximately 26% percent of all the people who completed the initial application withdrew before making it to underwriting (where the loan application is officially reviewed).

• Loan Officers and applicants specifically noted the document collection process as the most daunting and difficult. Most applicants were pleased with Accion’s responsiveness but were intimidated or frustrated with the time and effort the document collection required on their part.

Certainly, some applicants who drop out at before completing the process just do not receive the loan to grow their business. However, a worse option would be that they instead turn to a predatory lending option.

Experiment

We designed an email experiment to increase the number of applicants who complete the application. We chose our four conditions from past research on the effectiveness of deadlines and just-in-time information. After an applicant speaks with a Loan Officer about their desired loan, the applicant received an email that is randomly selected from four possible email templates.

Results

Our sample size was smaller than we had expected (about 400 instead of 850). We decided not to include data from a regional office that had to drop out early on due to questions around test execution. Across the other regional offices, we did not find significant differences between the control and the deadline condition or the link to info condition. We did, however, find a trend that the condition with both a deadline and a link to more information actually had a lower percentage of applicants that eventually submitted all of their required documents – at 47%, a 12% decline from the control ( p=0.054).

Why the intervention may have decreased completion rates is not entirely clear, especially considering a prior study with Kiva found that adding a deadline to their standard email did increase completed applications by about 3%. It’s possible that having both elements in the email led to information overload and avoidance, driving to lower completion rates. The intervention was also fairly light-touch – the only mention of the deadline was in one email and there were no follow-ups that reinforced any of the treatment conditions.

Importantly, the test also asked a lot of loan officers. While we tried to minimize the demands on the Loan Officer, it was still additional work outside of their typical process and there were times when they simply forgot to include it. Thus, it’s possible that the decrease was a result of noisy data. If we had developed a way to fully automate the randomization and data collection without involving the Loan Officers, we might have had a larger sample and seen a clearer effect.