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Fed Study: Small Biz Confused about Online Lending
Monday, August 31, 2015 6:45 AM

Small businesses report difficulty in comparing online credit products to traditional ones and are concerned about privacy and data security, according to a study conducted by the Cleveland Federal Reserve Bank and the Federal Reserve Board. The study's authors recruited 44 small business owners (with two to 20 employees and less than $2 million in annual revenues) to gauge their thoughts on using online lenders.

Recent surveys indicate that small businesses are increasingly turning to rapidly growing online lending resources, which generally offer small-dollar credit products such as cash advances, lines of credit, and other types of loans.

According to the Cleveland Fed survey, while focus group participants demonstrated openness to online lenders, they have a number of concerns:

  • They expressed concerns about data security and privacy. A majority of participants relayed negative and neutral initial top-of-mind impressions of online lenders. This is in part due to the lenders’ collection of businesses’ financial data, which raised security and privacy concerns;
  • Many participants found uncertain or incorrect information when making specific product comparisons, particularly for costs. The participants used information available on online lenders’ websites to make their analysis; and
  • Almost all participants said they wanted clearly stated product features and costs, as well as an easier way to compare product offerings. Among the suggestions were: expression of interest rates as annual percentage rate, straightforward explanations of all fees, and required statements about payment policies, especially on late fees and prepayment penalties.

The U.S. Treasury recently announced a request for comments on online lenders that serve both consumers and small businesses. Comments are due to the Treasury by Sept. 30.