Fed publication explores experiences of small businesses that apply for financing at online lenders

Today, the Federal Reserve Bank of Cleveland released a new study, Click, Submit 2.0: An Update on Online Lender Applicants from the Small Business Credit Survey. The study finds that compared to firms that apply at only traditional lenders, firms that apply at online lenders are more likely to be smaller, have lower credit scores, report more financial challenges, and be less profitable. The study further finds that small businesses that apply at online lenders have greater success obtaining credit than firms that apply at only traditional lenders, despite having lower credit scores. Nonbank online, or “fintech” lenders, are a growing source of small-dollar credit for small businesses. The Small Business Credit Survey findings indicate that the share of applicants that sought funding at an online lender increased from 19 percent in 2016 to 24 percent in 2017 and to 32 percent in 2018. As online lending has become more mainstream, questions arise as to which firms tend to use online lenders, why and where they have chosen to apply, how successful they are in obtaining funds, and how satisfied they are with their experiences as borrowers.

This study, by Ann Marie Wiersch, Federal Reserve Bank of Cleveland, Scott Lieberman, Federal Reserve Bank of New York, and Barbara J. Lipman, Federal Reserve Board, uses data from the 2018 Small Business Credit Survey to examine these questions.

Among their additional findings:

• Black-owned and Hispanic-owned firms are more likely than white-owned and Asian-owned firms to report they applied at an online lender.
• Online-lender applicants are more likely than traditional-lender applicants to apply for smaller amounts of financing and to seek funding to cover operating expenses.
• Nearly half of firms (49 percent) that applied to both traditional and online lenders reported they submitted at least four applications. Among firms that applied at either traditional or online lenders only, just 13 percent submitted four or more applications.
• Among firms approved for financing, satisfaction levels were lower at online lenders as compared to satisfaction levels at both large and small banks.

For the complete report: Click, Submit 2.0: An Update on Online Lender Applicants from the Small Business Credit Survey

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479