Fed: Smaller companies drawn to fast, easier credit online.
Byline: William Morris
When small or midsize businesses need capital today, they tend to need it quickly.
That's one of the findings of the 2019 Small Business Credit Survey, released Tuesday by the Federal Reserve System.
The nationwide survey of businesses with between two and 500 employees found that businesses are turning more and more each year to online lending sources rather than traditional banks, despite generally poor customer satisfaction. The most common reason given? Speed of decision or funding, according to 63% of online lending applicants, followed by 61% citing a better chance of being funded.
"We can tell from the factors that they cite in their choice of lender that they prioritize speed far above cost and interest rates," a Federal Reserve Bank official who worked on the report said in a background briefing on the report for media. "So only 13% of the online lender applicants that said that the cost was an important factor in their choice."
In general, survey respondents voiced optimism about 2019, with 72% expecting revenue growth. As in past years, fewer companies added workers in 2018 (37%) than had predicted they would the year before (48%), and looking forward to 2019, only 44% of companies predicted adding employees.
The survey found most businesses seeking loans online turn to direct lenders such as Kabbage or OnDeck, with smaller shares applying to payment processors, peer-to-peer lenders and cash advance providers.
While the share of companies seeking credit from traditional banks has remained largely flat in recent years, the number seeking credit online has jumped from 19% in 2016 to 24% in 2017 to 32% last year. Companies that reported higher credit risk were particularly likely to apply to online sources, the only avenue that approved such loans more than half the time.
But while online lenders are indeed faster and more likely to approve loans than their traditional counterparts, the survey found many companies voicing regrets. Net satisfaction for online lenders in 2018 was 38%, compared with 55% for large banks and 73% for small banks.
"The most commonly mentioned challenges among the online lender applicants were high interest rates and unfavorable...
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