Among Small Businesses Seeking Financing, Online Lender Applicants Cite High Interest Rates and Unfavorable Repayment Terms Amid Declining Approval Rates

The share of small businesses seeking credit at online lenders steadily grew in the years leading up to the COVID-19 pandemic. Following the onset of the pandemic, however, applications to online lenders declined, as did their approval rates, with the rate of denials exceeding those of small and large banks, according to an analysis of data from the Federal Reserve's 2021 Small Business Credit Survey.

The analysis contrasts with prepandemic survey results which show that online lender applicants consistently reported higher approval rates than applicants at banks of any size.

This has implications for smaller-revenue, newer, and Black- and Hispanic-owned firms, which disproportionately seek financing at online lenders compared to white- and Asian-owned businesses.

Key findings about the online lending research:

• While small businesses most often applied for financing at banks, nearly one quarter applied at online lenders
• High-credit-risk and newer firms were more likely than low-credit-risk and more established firms to apply at online lenders
• Online lender applicants were less satisfied with their experiences than were bank applicants. Among applicant firms that were at least partially approved, 76 percent of small bank applicant firms reported satisfaction with their lenders, compared to only 39 percent of online lender applicants.
• Online lender applicant firms often reported challenges with high interest rates and unfavorable repayment terms.

Overall, approved applicants cited fewer challenges with their lender experiences than did applicants that were denied. The only exception was at online lenders, where approved applicants were more likely than denied applicants to cite challenges with high interest rates and unfavorable repayment terms. This finding suggests that online lender applicants may have been offered pricing and terms that differed from what they expected.

The need for clear and consistent disclosures for small business credit products is a topic of discussion among small business advocates, online lenders, and government policymakers alike. The researchers note that as new state laws requiring standardized disclosures take effect and as other state legislatures consider actions, future studies could help to shed light on whether disclosures would be beneficial to small business borrowers.

Read more:Clicking for Credit: Experiences of Online Lender Applicants from the Small Business Credit Survey

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