Click, Submit: New Insights on Online Lender Applicants from the Small Business Credit Survey
How do small businesses that apply to online alternative lenders compare to those that apply to traditional financial institutions only? And in what ways do their experiences with lenders differ? This analysis draws from data in the Federal Reserve’s 2015 Small Business Credit Survey to examine these questions. Among the main findings: Firms using online lenders tend to be smaller, younger, and less profitable than firms using traditional lenders, and are more likely to be minority-owned. Furthermore, firms that sought credit from online lenders reported lower overall approval rates—despite the perception among many small-business owners that they have a higher chance of being funded by an online lender. Finally, successful applicants reported lower levels of satisfaction with their online lenders, citing in particular concerns with high interest rates.
About Online Lenders
Nonbank online lenders, also referred to as online alternative or “fintech” lenders, represent a small share of total small-business lending, but are a growing source of financing for small firms across the U.S. These lenders utilize data-driven processes and technology for underwriting, pricing, servicing, and delivering funds to borrowers. They offer various small-dollar credit products to small-business customers such as short- and fixed-term loans, lines of credit, and merchant cash advances. One in five 2015 SBCS respondents reported that they applied for financing at an online lender. The report explores differences between these online lender applicants and traditional lender applicants, and raises issues for borrowers that merit further research.
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The views expressed in this report are those of the author(s) and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.