Loan application due diligence and financing small firms in Africa

Banks gauge and verify business potential when processing small business loan applications by conducting due diligence on the firm. Although research has examined the factors that influence small business financing, little attention has been given to understanding the due diligence process that informs credit decision making. We address this gap using signal theory to analyze and develop insights from 24 qualitative interviews. Our study identified 11 key hard and soft signals loan officers use to access small business credit risk during due diligence. The key signals include key person risk, change in leadership risk, articulation of company value, adaptation to change, separating business and personal finances, personal reputation, transparency and willingness to share information, data accuracy and completeness, regular account operation, faulty budget and turnover assumptions, and legitimacy of collateral. The implications for small and medium-sized enterprises finance theory and practice are discussed.