SBA Hot Topic Tuesday – Applicants Report High Interest Rates & Unfavorable Repayment Terms at Online Lenders

August 30, 2022

Delaney Sexton
Contributing Editor

SBA Hot Topic Tuesday – Applicants Report High Interest Rates & Unfavorable Repayment Terms at Online Lenders

“Nonbank online lenders serve as an important source of capital for small businesses,” reads a recent Small Business Credit Survey report from the Federal Reserve Banks. “The number of small businesses seeking credit online steadily grew in the years leading up to the COVID-19 pandemic. Following the onset of the pandemic, supply of and demand for online credit changed in several ways. Online lender approvals declined in response to rising delinquencies and weak investor interest. On the demand side, fewer firms applied for credit due to economic uncertainty and the availability of government relief funding—notably, the Paycheck Protection Program (PPP).”

Here are the facts:

• Using data from the 2021 Small Business Credit Survey, 23% of small business owners that applied for financing in the previous year applied at an online lender. This is down 10% from before the pandemic.

• Online lenders were least likely to fully approve applicants (30%) when compared to large and small banks (32% and 46% respectively).

• Borrowers were least satisfied when applying to an online lender. Of those who were denied only 1% were satisfied and those that were at least partially approved were 34% satisfied. For comparison, 11% of borrowers who were denied at a small bank were satisfied, and 76% of those who were at least partially approved at a small bank were satisfied.

• Nearly half of the online lender applicants reported that high interest rates were a challenge with online lenders.
• Online lender applicants also reported unfavorable repayment terms (34%) more frequently than those that applied at banks.
• Applicants that applied to online lenders were less likely to report a difficult application process and a long wait for credit decisions or funding.

“This suggests that small businesses may not fully understand the cost and terms of some online financing products until after they are approved or funded. Online lender applicants, then, may carry a higher risk of taking out financing with costs and terms that they may not fully understand at the time of the application or that the business may be unable to afford,” reads the report. “The need for consistent disclosures for small business credit products is a topic of discussion among small business advocates, online lenders, and government policymakers alike.”

Source:
Small Business Credit Survey, Federal Reserve Banks