Small Businesses' Shift in Credit Seeking Behavior Amid Pandemic: Analysis Reveals Disparities and Challenges

Strategic Insights -

The share of small businesses seeking credit at online lenders increased before the COVID-19 pandemic but declined afterwards, with significantly lower approval rates compared to banks. This trend is particularly concerning for historically underbanked firms, including smaller-revenue, newer, and minority-owned businesses. The analysis of the Federal Reserve's 2021 Small Business Credit Survey highlights the complexities and challenges associated with online lending, including high interest rates and unfavorable repayment terms, which may be detrimental to small business borrowers.

Key Takeaways:

  • Small businesses most often applied for financing at banks, but nearly one quarter applied at online lenders.
  • High-credit-risk and newer firms were more likely to apply at online lenders.
  • Online lender applicants were less satisfied with their experiences, with only 39% reporting satisfaction with their lenders compared to 76% of small bank applicant firms.
  • Approved applicants cited fewer challenges with their lender experiences than did applicants that were denied, with a notable exception at online lenders, where approved applicants were more likely to cite challenges with high interest rates and unfavorable repayment terms.
  • The findings suggest that online lender applicants may have been offered pricing and terms that differed from what they expected.
  • Clear and consistent disclosures for small business credit products are a topic of discussion among small business advocates, online lenders, and government policymakers.

Statistics:

  • 24% of small businesses applied at online lenders compared to 76% at banks.
  • High-credit-risk and newer firms were 2.5 times more likely to apply at online lenders.
  • Only 39% of online lender applicants reported satisfaction with their lenders, compared to 76% of small bank applicant firms.
  • 76% of approved small bank applicant firms reported satisfaction with their lenders.
  • 63% of approved online lender applicants cited high interest rates and unfavorable repayment terms as key challenges.

Sources:

  • Federal Reserve, Small Business Credit Survey, 2021
  • Cleveland Fed, "Among Small Businesses Seeking Financing, Online Lender Applicants Report Challenges," August 16, 2022
  • Cleveland Fed, "Small Business Credit Survey Report: Online Lender," 2022

Note: The statistics and key takeaways are based on the original text and the referenced source.