The Federal Reserve recently released a report about small business lending: Browsing to Borrow: “Mom & Pop” Small Business Perspectives on Online Lenders. which explores small business owners’ experiences and perceptions of online lending. As online lenders increasingly become mainstream financing sources for small businesses, this publication sheds light on how borrowers view these platforms and how clearly they understand the lending terms presented.
Federal Reserve SMB Lending: About the Participants
This study focused on a relatively small group - 42 small business owners - and was not intended to generate broad conclusions. Rather, its goal was to uncover recurring themes that can guide further research, industry improvements, and future policy development.
The participants represented U.S.-based “Mom & Pop” businesses, which were defined as having between 1 and 20 employees and less than $2 million in annual revenue. All had sought some form of credit in the prior 12 months.
Many participants echoed common challenges faced by small businesses, including:
Online Lenders vs. Traditional Lenders
Online lenders assess applicants using both traditional and alternative metrics. Beyond credit scores, they may consider:
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Credit card sales
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E-commerce revenue
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Shipping volume
This broader evaluation can open doors for borrowers who might not qualify through conventional banks. However, despite this potential accessibility, participants in the study expressed a clear preference for traditional financial institutions, personal contacts, or credit cards over online lenders.
For those who had used online lenders, the main draw was greater flexibility in approval, especially compared to risk-averse banks. Still, negative perceptions were common due to aggressive sales outreach, including frequent emails, calls, and direct mail.
Key Takeaways from the Federal Reserve Report
The study highlighted several trends and insights, including:
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Information Transparency Matters: Lenders that provided comprehensive product details—interest rates, repayment terms, and total costs—earned greater trust. Participants preferred this information before being asked to provide personal or business data.
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Distrust of Opaque Practices: Sites requiring upfront contact info without disclosing loan details were met with skepticism. Limited or vague product descriptions led to lower trust and appeal.
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Disclosures Matter: Sample loan product disclosures lacked clarity. However, a standardized disclosure table that included rates, fees, and payment schedules was met with widespread approval.
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Lack of Regulation: Business-purpose loans are not governed by the Truth in Lending Act, which mandates disclosure for consumer credit. This regulatory gap allows online lenders to use inconsistent language and repayment terms (e.g., daily or weekly repayments, fees described as “cents on the dollar”), leading to confusion.
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First Impressions Can Improve: While most had negative initial views of online lenders, a few revised their opinions after reviewing clearer examples of product information online.
The Importance of Better Disclosures
A central insight from the study: Clear, upfront disclosures are essential to building trust. Business owners want:
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Interest rates and payment terms in plain language
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Visual breakdowns of fees, total repayment costs, and schedules
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Familiar consumer-style disclosures that match what they see with personal credit products
Importantly, 52% of participants who were approved for an online loan still expressed dissatisfaction, often due to higher-than-expected interest rates. This signals a gap in borrower understanding, potentially because product disclosures were not easy to interpret.
Moving Forward: Opportunities for Improvement
The report recommends that fintech's and lenders adopt best practices for disclosure design and financial education, such as:
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Standardized cost calculators
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Simulations showing different repayment scenarios
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Easy-to-understand product comparison tools
Ongoing controlled experiments and usability testing are also suggested to improve how loan information is presented.
For small business owners seeking financing, the key takeaway is to research thoroughly and ensure that any loan provider is transparent and aligned with their business goals. And for the industry, there’s a clear path to increasing borrower satisfaction: provide more clarity, consistency, and borrower-friendly information.
