More Small Business Owners Turning to Online Lenders

When businesses are in need of a loan, where do they turn? Previously many may have said their local bank or another major institution. Although that's still often the case, the number of entrepreneurs looking to online lenders for funding continues to grow. A new study by Federal Reserve Banks found that the percentage of small business owners applying to online lenders is on the rise. Of those surveyed, 32% had applied for loans, lines of credit, or other funding from online lenders in 2018. By comparison, only 24% and 19% turned to online lenders in the 2017 and 2016 editions of the study respectively. Despite the gains, online lenders remained the third most popular option for small business owners in need of loans as big banks led the way with 49% followed by small banks with 44%. Noting this increase, the Fed then asked entrepreneurs why they choose to apply to the institutions that they did. Among those who applied to online lenders, 63% cited the speed of the decision and the funding as their top factor. In contrast, 58% of those who applied to big banks and 65% who applied to small banks said that their existing relationships with the lender had the biggest influence on their choice. The second place answer — "chance of being funded" —  was uniform across the board, although it played a bigger role for those who applied to online lenders than banks. Finally the third largest factor varied by the type of institution with 29% of big bank applicants saying the cost or interest rate was a factor, 30% of small bank applicants citing speed of decision, and 45% of online applicants noting that lack of collateral requirements influenced their choice. It's really no surprise that those who applied to online lenders were more likely to note that their chance of being funded was a reason why they shied away from banks as the study found that online lenders approved more applications than others. In fact this year's report found online lenders had an 82% approval rate for loans, lines of credit, and cash advances in 2018. That's up seven points from 2017 and 13 points from 2016. That said approvals were also up among all size banks — albeit it by more modest margins. Last year approvals at small banks rose from 68% to 71% while big banks improved approvals from 56% to 58%. Given the growing number of online small business lending options, it only makes sense that more entrepreneurs would be turning to these lenders. Moreover it's clear that the speed of funding that many of these platforms offer coupled with higher approval rates are making them more popular among entrepreneurs in need of working capital. While these online institutions may not be able to compete with banks in terms of long-term relationships just yet, their ubiquity means it won't be much longer before that becomes a factor as well. In all, it seems that this trend will only continue.

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