Small businesses need more access to credit, but many banks will not give business loans to owners who have less than two years of business history or who have low (or no) credit scores. With limited access to capital and new “alternative” lenders on the scene, however, more small businesses are falling victim to unregulated, predatory lenders.
One study by Opportunity Fund found a 94% average annual percentage rate (APR) of sample “alternative” loans. It is difﬁcult to estimate the exact volume, though, because they are structured as commercial transactions instead of loans and are not subject to banking laws such as the Truth in Lending Act.
To help these small business owners, we partnered with Accion, a fair and flexible lender with over 6,000 borrowers. Accion also facilitates connections to business experts and access to resources and opportunities tailored to each business owner’s unique needs and goals.
Behavioral Diagnosis and Key Insights
Before Accion grants a loan, they request some background information and documents, such as bank statements, business plans, or a proﬁt-and-loss statement, in order to evaluate the health of the business. Gathering these documents may be cumbersome or overwhelming, and 26% of applicants who complete an initial application drop out of the flow at this point in the process, thereby not moving on to receive the loan to grow their business.
Even worse, they may instead turn to a predatory lender or “cash advance.”
We chose to tackle this speciﬁc problem for our test because the barrier is large and the consequences of dropping out can be severe.
We reviewed Accion’s application data and applicant funnel and 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. 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.
Based on the information we analyzed, we designed a four condition email experiment to increase the number of applicants who complete the application (speciﬁcally, completing the document submission phase of the application). We chose our four conditions from past research on the effectiveness of deadlines (including a previous Common Cents Lab project with Kiva) and just-in-time information.
After an applicant speaks with a Loan Ofﬁcer about their desired loan, the applicant will receive an email that is randomly selected from four possible email templates:
- Email including generic language with instructions for submission (control);
- Email including a deadline (one week out) for documents to be received;
- Email including a link to more information about the requested documents;
- Email including both a deadline for documents to be received and the link to the document deﬁnitions.
We launched this experiment across four regional offices in July 2017. This experiment will be in the field until Q1 2018. To date, over 300 applicants have participated. We plan on measuring application completion rates by condition.