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Online financing more popular — also more perilous

More business owners are turning to online lenders as a source of financing.

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  • | 1:57 p.m. July 5, 2019
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More business owners are turning to online lenders as a source of financing, according to a new report — even as satisfaction among that sector trends downward.

The report, the latest Small Business Credit Survey from the Federal Reserve, shows demand for financing is consistent: Nearly half the respondents, 43%, applied for new capital in 2018, following 40% in 2017. Financing shortfalls were particularly pronounced among firms with weak credit profiles and companies that were unprofitable, young and in urban areas, the survey adds.

In the chase for funding, 32% of businesses that responded to the survey turned to online lenders in 2018 — up from 24% in 2017 and 19% in 2016. Yet satisfaction with online lenders from those same applicants, 49%, pales in comparison to other funding sources. Credit unions had a satisfaction rate of 85%, the survey shows, while small banks were close behind at 79%. Even large banks, panned often by businesses as being hard to work with, scored a 67% satisfaction rate, the survey reports.

A majority, 60%, of businesses that sought online financing reported challenges with applications, compared with only about half of all large bank and small bank applicants. The most common issue with online lenders? Unfavorable repayment terms and high interest rates. Online lenders were cited more than twice as often for those challenges than large banks, small banks or credit unions, according to the survey.

The survey was conducted in the 2018 third and fourth quarters, among businesses with 1 to 499 employees. Other findings in the survey include:

• More than half, 54%, of small businesses that applied for $250,000 or less didn’t receive the full amount of financing sought;

• Nearly three-fourths of respondents, 73%, reported an increase in costs in the past 12 months. More than half those firms, the survey reports, raised prices in response;

• Nearly one-fourth of the respondents, 23%, hired more people over the past year, up from 19% in 2017; and

• More than two-thirds, 35%, of respondents reported revenue growth, up from 28% in 2017.







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