Oghenekome Umuerri

• Small business lending is significantly influenced by the interplay between the information institution types, the information models, and the due diligence process undertaken by financial institutions. While previous research has examined the impact of hard and soft information on credit availability, limited attention has been given to how different combinations of these information types and various financial institution types influence the quality of loan applications and the loan application success rates. Additionally, the role of due diligence in assessing small business loan applications and the specific signals lenders rely on for decision-making remain underexplored. This study integrates insights from three research streams to provide a unique analysis of small business lending dynamics. First, based on primary data collected from 242 small firms in Ghana and considering different financial institutions, including non-banks, we examine the effect of three distinct combinations of hard and soft information on loan application success rates. Our findings challenge conventional wisdom, indicating that an increased emphasis on soft information does not necessarily enhance transparency or improve loan application success rates. Moreover, while small-sized banks positively influence credit availability, this effect does not extend to small-sized non-banks. Second, leveraging signal theory, we analyze the due diligence process undertaken by financial institutions through qualitative insights from 24 loan officer interviews. We identify 11 key hard and soft signals that influence credit risk assessments, including key person risk, change in leadership risk, articulation of company value, adaptation to change, data accuracy, and completeness. These insights highlight the multifaceted nature of credit decision-making.