B oard of G overnors of the F ederal R eserve S ystem
Uncertain Terms:
What Small Business Borrowers
Find When Browsing Online
Lender Websites
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B oard of G overnors of the F ederal R eserve S ystem
Uncertain Terms:
What Small Business Borrowers
Find When Browsing Online
Lender Websites
December 2019
Barbara J. Lipman
Manager, Policy Analysis Unit, Division of Consumer & Community Affairs
Federal Reserve Board
Ann Marie Wiersch
Senior Policy Analyst, Community Development
Federal Reserve Bank of Cleveland
Special thanks to Scott Colgate and PJ Tabit from the Federal Reserve Board for their considerable
assistance with the technical aspects of the website review, including the assessment of visitor
tracking tools.
The authors wish to thank the following colleagues for their thoughtful comments, managerial support,
and guidance: Angelyque Campbell and Alejandra Lopez-Fernandini from the Federal Reserve Board
and Lisa Nelson from the Federal Reserve Bank of Cleveland. The authors also appreciate research
assistance provided by Lucas Misera and Logan Herman, former interns at the Federal Reserve Bank
of Cleveland. Finally, thanks are due to Madelyn Marchessault, Susan Stawick, Pamela Wilson,
and Anita Bennett from the Federal Reserve Board for the valuable assistance they provided to this
publication.
The views expressed here are those of the authors and not
necessarily those of the Board of Governors of the Federal Reserve
System or the Federal Reserve Bank of Cleveland.
Mention or display of a trademark, proprietary product, or firm
in the report does not constitute an endorsement or criticism by
the Federal Reserve System and does not imply approval to the
exclusion of other suitable products or firms.
Contents
Executive Summary ........................................................... 1
Overview of Small Business Online Lending ......................................... 3
About the Study ............................................................. 5
Themes and Observations from Online Lender Website Analysis ......................... 11
Comparing Online Lender Websites to those of Banks and Payments Processors ............ 21
Tracking Website Visitors ....................................................... 23
Implications and Policy Questions ................................................. 25
1
Executive Summary
This report discusses findings of a study conducted by the Federal Reserve Board and the Federal
Reserve Bank of Cleveland to assess the information presented to prospective borrowers on small
business online lender websites. The Federal Reserve has an ongoing interest in small businesses
and their access to the credit they need to succeed and grow. Without adequate credit, they may
underperform, slowing economic growth and employment. As the small business credit market
evolves, prompting discussion about borrower protections, the experiences of small business
owners are an important consideration.
Nonbank online lenders are becoming more mainstream alternative providers of financing to small
businesses. These nonbank lenders offer small-dollar credit products including cash advances,
lines of credit, and various types of loans, typically under $100,000. Borrowers can apply in minutes
and receive funds in days or even hours, expedience made possible with data-driven technologies.
The industry’s growing reach has the potential to expand access to credit for small firms, but also
raises concerns about product costs and features, and the manner in which these are disclosed to
prospective borrowers.
This study considers the information that is important to prospective borrowers and the availability
of such information on lender websites for the purposes of understanding and comparing product
costs and features. The study includes a systematic analysis of the content on online lender
websites, such as, where and how credit products’ costs and other details are disclosed, how
much product information is made available before website visitors are asked to supply the owner’s
personal or business information, and the extent to which visitors are tracked.
Key Findings of the Study
Online lenders varied significantly in the amount of information provided, especially on costs.
Lenders that offer term loan products were likely to show costs as an annual rate, while others
convey costs using terminology that may be unfamiliar to prospective borrowers. Still others,
particularly those that offer merchant cash advances, provide no information at all.
Among lenders that provide cost details, their websites varied in the presentation of information.
Lenders commonly present lowest-available rates. Ranges or average rates, if shown, are most
often found in footnotes, fine print, or frequently asked questions (FAQs).
On a number of the websites examined for this study, prospective borrowers must provide the
lender with personal and business information in order to obtain details about products’ costs
and terms. Lenders’ policies permit any user-provided data to be used by the lender and other
third parties to contact business owners, often leading to bothersome sales calls.
Online lenders make frequent use of trackers to monitor visitors on their websites. So, even when
visitors do not share identifying information with the lender, embedded trackers may collect this
information, as well as data on how visitors navigate the lender’s website and other sites they visit.
2
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Several implications arise from these findings, and addressing these issues is all the more important
as online lending becomes more mainstream. For one, the lack of standardization in product
descriptions across lenders’ websites was identified in previous focus group research to be a source
of confusion for small business owners. Focus group participants reported challenges understanding
product terms and making product comparisons, suggesting that standardized disclosures could
support more informed borrowing decisions. Moreover, in cases where lenders do not provide up-
front pricing details, businesses incur a “cost” when sharing their information to request a quote
or start an application. In addition to exposing their business to a potentially burdensome number
of phone calls and a flurry of marketing content, some lenders may run credit checks early in the
process, even if the business owner is just shopping rates. Furthermore, businesses could be
subjecting their data to use by lenders and other third parties.
Finally, the data collected from trackers may be matched with data from external sources to develop
profiles of small businesses that shop for credit online. Small business advocates have voiced
concerns that data collected surreptitiously through trackers may be matched with data from third-
party sources to identify individual business owners. It is unclear whether these data are used to
underwrite and price offers of credit.
3
Overview of Small Business Online Lending
Online lenders are nonbank credit providers that serve small business borrowers using data-driven
processes and technology. These lenders are increasingly becoming mainstream providers of
financing to small businesses.
1
According to the Federal Reserve’s Small Business Credit Survey
(SBCS), an annual survey of small businesses, credit seekers are increasingly turning to online
lenders. Over the past three years, the share of applicants that reported they applied at an online
lender increased from 19 percent in 2016 to 24 percent in 2017, and to 32 percent in 2018.
2
Customers of online lenders apply, are processed, underwritten, receive funds, and are serviced
largely—though not entirely—online. While the structure and features of the credit products vary
significantly, they generally fall into one of two categories:
Loans and lines of credit: Some loans are term loans with fixed rates, multi-year terms, and
fixed monthly payments. Other products have a less traditional structure, with fixed fees or total
repayment amounts, and requiring weekly or daily payments. Equivalent annual percentage rates
(APRs) typically range from 10 percent to 80 percent, and funds are often repaid in six to 18
months.
Merchant cash advances (MCAs): MCAs entail the sale of future receivables for a set dollar
amount, repaid with a set percentage of the business’s daily sales receipts. For example,
$50,000 in capital is provided in exchange for $65,000 in future receipts, repaid with automatic
draws of 10 percent of daily credit card sales. Depending on the speed of repayment, equivalent
APRs may exceed 80 percent or even rise to triple digits. MCAs are generally repaid in three to
18 months.
Lenders themselves vary in their business models, as some lend their own funds while others
connect borrowers with investors. Note that for purposes of this report, lenders utilizing any of these
business models and offering these types of products are referred to as “online lenders.” Though
some online lenders specialize in specific types of financial products, it is clear from Federal Reserve
focus group studies that small business owners view these companies collectively as lenders, and
their various products as loans. Payments processors are also active in lending, as they offer loans
to the merchants that process payments through their online platforms, but for this analysis are
considered separately.
Lenders assert that they are broadening access to credit, reaching borrowers underserved by
traditional lenders. SBCS data suggest that smaller, newer, and minority-owned firms are more likely
1
Because online lenders have no requirements to report lending volumes, there are no reliable figures on industry growth;
however, top small business lenders that publish statistics have indicated steady increases in lending.
2
The Small Business Credit Survey is an annual survey of employer and non-employer small firms administered by the 12
Federal Reserve Banks; see https://www.newyorkfed.org/smallbusiness/small-business-credit-survey-2018.
4
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
to apply to online lenders.
3
In addition, the data suggest medium- and high-credit-risk applicants
have had greater success obtaining credit at online lenders than at traditional banks (approval rates
of 76 percent versus 34 percent at large banks and 47 percent at small banks).
4
Applicants that chose to seek financing at online lenders reported the most important factors in their
choices were the speed at which they expected lenders to approve and/or fund their application,
and their perceptions that they had a better chance of being approved at an online lender.
While more applicants are successfully funded at online lenders, the SBCS indicates satisfaction
levels with online lenders are far lower than with traditional lenders (net satisfaction of 33 percent
at online lenders versus 73 percent at small banks and 55 percent at large banks).
5
In 2018, 63
percent of online lender applicants reported challenges working with their lender, with more than half
saying they experienced high interest rates and almost a third reporting concerns with unfavorable
repayment terms.
Also, it is important to note that the Truth in Lending Act (TILA) rules that apply to consumer loan and
credit products generally do not apply to business credit, so in practice, lenders have more flexibility
in their disclosures of product costs and features.
6
And indeed, as discussed in the next section,
qualitative studies suggest that small business owners struggle to understand the wide range of
products offered by online lenders and the unfamiliar terminology that some lenders use in their
product descriptions.
3
Ann Marie Wiersch, Barbara J. Lipman, and Brett Barkley, Click, Submit: New Insights on Online Lender Applicants
from the Small Business Credit Survey, (Federal Reserve Bank of Cleveland special report, October 2016), https://www.
clevelandfed.org/newsroom-and-events/publications/special-reports/sr-20161012-click-submit.aspx. As of this writing, an
updated version of this report is forthcoming. See also, Mark E. Schweitzer and Brett Barkley, “Is ‘Fintech’ Good for Small
Business Borrowers? Impacts on Firm Growth and Customer Satisfaction,” Working Paper 17-01 (Federal Reserve Bank
of Cleveland, February 2017), https://www.clevelandfed.org/newsroom-and-events/publications/working-papers/2017-
working-papers/wp-1701-is-fintech-good-for-small-business-borrowers.aspx.
4
Federal Reserve System, 2019 Report on Employer Firms: Small Business Credit Survey, https://www.fedsmallbusiness.
org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf. Approval rate is the share of firms approved
for at least some credit.
5
In the SBCS, net satisfaction is the share of firms satisfied minus the share of firms dissatisfied.
6
The Truth in Lending Act is implemented through Regulation Z. Regulation Z does impose certain substantive protections
applicable to credit card holders, including where the card is issued for business use. Alternative small business lenders,
however, do not typically issue credit cards.
5
About the Study
This study builds on prior work, including two rounds of focus group studies conducted by the
Federal Reserve (see box 1) and quantitative findings from the SBCS.
7
The participants in these
focus group studies—more than 80 small business owners—completed a “virtual shopping” exercise
and compared mock products based on real online product offerings. These studies found that
small business owners struggle to understand many of the products offered by online lenders and
the unfamiliar terminology that some lenders use in their product descriptions.
8
Box 1. Background on Focus Groups Studies
Online focus groups with more than 80 business owners
Two rounds of focus groups: 2014–2015 and 2017
Participants were the business owner or financial decisionmaker
Participants’ small businesses:
— Less than $2 million in revenue, fewer than 20 employees
— In business at least two years
— Included a variety of industries from across the United States
— Had applied for credit in the prior 12 months (2017 focus group only)
Topics:
— Process for seeking short-term credit
— Impressions of websites when virtually “shopping”
— Evaluations of mock credit products and recommendations
Key findings:
— Participants found the websites appealing, but many noted information they sought was not readily accessible
— They strongly disliked that information they considered important appeared in fine print or footnotes
— Terminology used to describe the products was unfamiliar to some
— They reported that aspects of the product descriptions were confusing or lacking sufficient detail
— They found it challenging to identify interest rates or estimate costs
— They made (sometimes mistaken) assumptions about the products based on past experiences with traditional
bank loans
This present study considers the information that is important to prospective borrowers and the
availability of such information on lender websites for the purposes of understanding and comparing
7
See Barbara J. Lipman and Ann Marie Wiersch, Alternative Lending Through the Eyes of “Mom & Pop” Small Business
Owners: Findings from Online Focus Groups (Cleveland, OH: Federal Reserve Bank of Cleveland, 2015), https://www.
clevelandfed.org/newsroom-and-events/publications/special-reports/sr-20150825-alternative-lending-through-the-eyes-
of-mom-and-pop-small-business-owners.aspx; and Barbara J. Lipman and Ann Marie Wiersch, Browsing to Borrow:
“Mom & Pop” Small Business Perspectives on Online Lenders (Washington: Federal Reserve Board, 2018), https://www.
federalreserve.gov/publications/files/2018-small-business-lending.pdf.
8
It is important to note that focus groups are designed to gather insights, not to measure incidence. Findings are not
necessarily reflective of a wider population of small businesses.
6
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
product costs and features. The study includes a systematic analysis of the content on online lender
websites, including:
where and how credit products’ interest rates, fees, repayment and prepayment terms, and other
features are disclosed;
how much product information is made available before website visitors are asked to supply the
owner’s personal or business information; and
the extent to which data on visitors are collected, either passively through trackers or actively
through inquiry forms.
This work was inspired by two previous efforts, one by the Federal Trade Commission (FTC) and the
other from the Financial Conduct Authority, the United Kingdom’s consumer protection agency.
9
Both studies examined how information was displayed on the websites of consumer online lenders,
identifying the number of clicks needed to obtain certain product information and the font displaying
that information. The FTC study also looked at the extent to which site visitors are tracked. These
two studies focused on consumer lenders, while the study presented in this report focuses on small
business credit providers.
Among the caveats to note, the scope of this study includes only the content and features of select
lender websites. Therefore, the findings should not be considered representative of all websites in
the industry. Importantly, the websites covered in the study largely overlap, but differ somewhat from
those that the participants chose to view in the focus group studies. Note that the study does not
explore what information lenders communicate directly to individual small business owners that seek
credit. Finally, the study does not address provisions of formal offers of credit or loan agreements,
and makes no attempt to assess whether the product terms described on lenders’ websites match
the terms in actual loan agreements.
Methodology
The authors considered several factors in developing the list of 10 online lending companies included
in the study. The list was compiled so as to include established lenders that report significant small
business credit activity. In addition, the authors considered which lenders small business owners
would encounter when conducting internet searches for small business lenders. To this end, the
authors consulted numerous lists of the industry’s largest lenders and conducted multiple keyword
searches, identifying those lenders that appeared earliest in the search results. Finally, the authors
attempted to ensure that a cross-section of lenders—based on business models and products
offered—were included. Note that the list is not representative of the composition of the industry,
which is highly fragmented and includes a significant number of small lenders, MCA providers, and
broker websites.
9
This study builds on earlier work by the Federal Trade Commission, “A Survey of 15 Marketplace Lenders’ Online
Presence,” June 2016, https://www.ftc.gov/system/files/documents/public_events/944193/a_survey_of_15_marketplace_
lenders_online_presence.pdf and the U.K. Financial Conduct Authority, Payday Lending Market Investigation, “Review of
the Websites of Payday Lenders and Lead Generators,” appendix 6.4, February 2015, https://assets.publishing.service.
gov.uk/media/54ebb75940f0b670f4000026/Appendices_glossary.pdf.
7
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Separate from the 10 online lenders, the study reviewed the websites of two payments processors
that extend loans to their merchant customers. These companies were considered separately
because offers of credit products are made to existing customers, based on information that the
company already has. Many of the considerations in the study, therefore, do not apply. Finally, for
comparison purposes only, the authors identified five commercial banks that offer online applications
for small business loans, and reviewed the presentation of product information on those websites.
The study itself involved a systematic review of the content on lenders’ websites, ways in which
their products are described, and the processes through which lenders collect information from
prospective small business borrowers. The authors reviewed 15 different aspects of the content,
documenting in standard forms the language used and where and how the information is displayed.
The specific variables reviewed are described in the following section. In addition, the study utilized
a Chrome browser extension to identify and quantify the number and types of third-party trackers
employed by the websites.
As noted earlier, this study is intended to capture the information that prospective borrowers
encounter when researching and comparing credit products. Therefore, throughout the report, the
content described is not associated with the names of specific lenders.
10
Although the information
shown is publicly available, company names have been anonymized as this analysis is intended
to describe typical practices in the marketplace rather than to single out practices of individual
companies.
Considerations for the Study
To ascertain which aspects of product descriptions should be considered in the study, the authors
consulted various sources.
Focus group studies: The participants in the two rounds of focus groups (outlined in box 1)
described the information they were looking for when they completed a virtual shopping exercise.
Participants identified the following details as being important to them as they searched for
information on online lenders and the funding products these lenders offer:
application process and information required by the lender for the application
approval requirements/qualifications
interest rates, fees, and other charges
repayment terms (frequency, length of term, method of repayment)
maximum available loan amounts
10
Online lenders considered in this study include BFS Capital, CAN Capital, Credibly, Fundation, Funding Circle, Kabbage,
Lending Club, National Funding, OnDeck, and Rapid Finance. Payments processors include PayPal Working Capital and
Square Capital. Commercial banks include Bank of America, Live Oak Bank, TD Bank, US Bank, and Wells Fargo. The
order in which the companies are listed here does not correspond to the identifiers used in subsequent sections of this
report.
8
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
time to approve application and speed of funding
trust cues (customer reviews, Better Business Bureau ratings, etc.)
Truth in Lending Act: While, as noted earlier, TILA rules generally do not apply to business credit,
the requirements provide a frame of reference for disclosure of credit products. Additionally, because
the business owners using online lenders tend to be smaller “mom & pops,” they are very consumer-
like in their approach to financing.
11
Most have limited financial expertise and, more often than not,
do not have a dedicated chief financial officer on staff.
Although not intended for small business credit, TILA provides useful guidelines for the advertising of
consumer credit products, including what’s shown on websites. The requirements ensure the costs
of various credit products are comparable since financing charges must be shown as an APR. The
guidelines also help to ensure important details—like repayment terms and fees—are described
clearly, so consumers are not misled by statements in advertising.
FTC dot.com guidance: The website analysis considers not only what is presented, but how it’s
presented. The FTC’s dot.com guidance says disclosures should
12
be truthful; not misleading or unfair,
use understandable language,
be readily noticeable to consumers and not require scrolling,
use the same font size as other text,
be located near advertising claims they qualify, and
not relegate necessary information to “terms of use.”
Taking the focus group findings, the TILA rules, and the FTC guidance into account, the authors
developed a framework for a systematic review of the description and display of 15 items (see box 2).
11
See Small Business Credit Survey, 2019 Report on Employer Firms, Data Appendix, Employer Firms by Revenue, https://
www.fedsmallbusiness.org/survey.
12
Federal Trade Commission, .com Disclosures: How to Make Effective Disclosures in Digital Advertising (March 2013),
https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-staff-revises-online-advertising-disclosure-guidelines/
130312dotcomdisclosures.pdf.
9
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Box 2. Elements Included in Systematic Website Review
Lenders’ appeal to prospective customers
— Main marketing pitch
— Trust cues, such as customer reviews, Better Business Bureau ratings, etc.
Application process
— Approval requirements and borrower qualifications
— Information required to initiate an application
— Application form and identification of product
— Impact of an inquiry on credit score
— Speed of approval and funding
Products, rates, fees, and features
— Level of detail in product descriptions
— Terminology used to describe interest rates and additional costs and fees
— Repayment terms
— Prepayment savings or penalties
— Maximum loan amounts
This review tracked language used on websites, the level of detail provided, and the position and
appearance of text for key information.
11
Themes and Observations from Online
Lender Website Analysis
Online Lenders Seek to Engender Trust
While online lenders have grown and become more mainstream, the industry is still relatively new
and faces challenges in attracting customers. One contributor to those challenges is the unfavorable
views of the industry held by some prospective borrowers.
During the focus group studies, small business participants were asked for their initial impressions
of “online lenders.” Some participants had positive perceptions. They thought of these lenders
as being faster, more efficient, and more willing to work with small business borrowers. Some
thought that, since they have less overhead, online lenders would be more affordable. However,
a larger share of participants had negative impressions, associating online lenders with high costs
and interest rates. Some of their responses indicated a lack of trust in online lenders, while others
mentioned unwanted calls, mail, and email.
Online lenders have positioned themselves as trusted alternative providers of small business credit,
advertising their faster, more convenient processes and their product options for firms with low credit
scores. The content on the lenders’ websites reflects their awareness of borrowers’ perceptions of
the industry. Indeed, focus group participants reported having more positive impressions of online
lenders after visiting some of the lender websites during the virtual shopping exercise.
The headings, taglines, and other prominent text on lenders’ websites convey their focus on speed
and simplicity (“Get a quote in minutes,” “minimal paperwork”), while also highlighting their flexibility
and willingness to work with small businesses with less-than-perfect credit (“High approvals,” “All
credit scores are considered”).
Some focus group participants were impressed with sites that offer comparison charts, but a review
of these charts suggests many lack specific content. Lenders give themselves check marks for fast
funding, easy process, and flexible approval criteria, shown side-by-side with unfavorable marks (Xs
or blanks) they attribute to nonspecific competitors (“banks” or “other lenders”). In most cases, these
charts simply reiterate companies’ sales propositions, while relaying minimal details about product
features or costs that would be useful to a prospective borrower who is comparison-shopping.
This analysis finds that online lenders seek to engender the trust of businesses visiting their
websites. This was most evident in the display of badges and logos of various business
intermediaries—such as the Better Business Bureau, Trust Pilot, and similar organizations. Mentions
of their companies in the media also were often featured on the pages, as well as ratings and
endorsements from outside organizations. Five of the 10 lenders also referenced a relationship with
an FDIC-insured bank. This strategy does appear to reassure some visitors:
12
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
“I’m not sure why I trust them, but I do. Maybe because they
state they are BBB accredited.”
“I appreciated how they address concerns about their
credibility up front with their BBB and TrustPilot rating.”
While reviews, ratings, and testimonials were valued by some focus group participants, a scan
of online lenders’ reviews and ratings revealed very little specific information about products;
however, these are the details that are important to borrowers, based on responses from focus
group participants. Most reviews were positive, but limited to customers’ early interactions with
their lenders. The majority either commented on positive experiences with sales representatives,
simple applications, or quick turnaround; they offered little insight on the products themselves or
experiences with the lenders after receipt of funding.
Inquiries Lead to Collection of Prospective Borrowers’ Data
All of the online lenders’ websites prominently feature links and buttons prompting visitors to “apply
now” or “get a quote.” These links connect visitors to pages on the websites with online forms to
input their personal and business information. These forms typically serve as an initial inquiry with a
lender, either requesting pricing information or initiating an online application. They collect contact
information from prospective borrowers, and in many cases, financial details—including annual
revenues, credit scores, and account balances. In at least one case, the lender requests that the
applicant grant access to the business’s Quickbooks account to expedite the application process.
Table 1. Select details on application processes from online lender websites
Online lender
Common application
form for all products
Initial inquiry impact
on credit score*
Consent to use of
contact information
Company A Not applicable, only one
product offered
Soft pull: “won’t affect your credit
score”
By clicking “continue” on
lenders “get a quote” form,
user gives consent
Company B Common application; fine
print on application form
notes user is not applying
for a specific product
Soft pull: “will not impact your personal
credit score”
By clicking “continue” on
application form, user gives
consent
Company C Common application; all
“get quote” links for all
products lead to same
form, same URL
Soft pull: “no credit impact to get a
quote”
By clicking “continue” on
“get my quote” form, user
gives consent
13
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Company D Not applicable, only one
product offered via online
application
Credit check: FAQs specify that credit
report is pulled for business owner
By clicking “get started”
on application form, user
consents to privacy policy
(includes permission to
contact)
Company E Common application;
all “apply now” links
lead to same form/URL,
regardless of page or
product
Soft pull: “no impact on credit score” Website’s terms of use
specifies that user expressly
consents to be contacted
Company F Common application;
“get started” links on all
product pages lead to
same form/URL
Soft pull: prequalification “does not
negatively impact your credit score”
Prequalification form
includes authorization to
contact
Company G Not applicable, only one
product offered
Soft pull: “won’t impact your credit
score”
Website’s terms of use
specifies that user expressly
consents to be contacted
Company H Common application;
all “apply now” links
lead to same form/URL,
regardless of page or
product
Not specified; terms and conditions
authorizes company and affiliates to
request credit report
By clicking “get started”
on application form,
user consents to terms
and conditions (includes
permission to contact)
Company I Common application for
two products, though
application link appears
only in the menu and not
with product descriptions
Not specified; privacy policy specifies
that the company may obtain credit
reports
Website’s privacy policy
specifies that users consent
to be contacted
Company J Common application for
two types of loans and
MCAs; “apply now” links
on both product pages
lead to same form/URL
Credit check; “personal credit check is
part of the approval process”
User must check box
indicating agreement with
privacy policy; permission to
contact also described in a
footnote on application form
Note: Although all information shown is publicly available, company names have been anonymized, as this analysis is intended to describe
typical practices in the marketplace rather than to single out practices of individual companies.
* A “soft pull,” also known as a soft inquiry, is a credit check performed by a lender to pre-qualify a prospective borrower. Unlike hard credit
inquiries, soft pulls do not appear on customers’ credit reports and do not affect their credit scores.
Source: Authors’ analysis of company websites, as of August, 2019.
A majority of the companies utilize a common application, that is, a single form for all products. For
example, the “apply now” link shown with a lender’s business loan description, and the “apply now”
link shown with their MCA description both lead to the same URL and application form. In such a
case, a prospective borrower may complete an application seeking a business loan. The concern is
that this may be a potential source of confusion for borrowers who think they may be applying for
one product, but are offered another product with different terms than what they were seeking.
Once a user completes a lender’s application or inquiry form, the lender begins steps to verify
the creditworthiness of the user and to establish terms of any credit offer that may be extended.
14
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Several companies advertise that their initial credit check will not affect the user’s credit score, often
specifying that only a “soft pull” is done upon receipt of the application or inquiry. Other companies
state, typically in Terms of Use or FAQ pages, that a credit check is part of the application process,
without reference to a soft pull.
Lack of Information Prompts Solicitation
Lenders vary significantly in the level of upfront information they provided to prospective borrowers.
On some sites, product descriptions feature little or no information about the actual products, but
instead focus on the ease of applying and qualifying for funding, the speed at which applications
are approved, and the array of uses for loan proceeds. Details that were important to focus group
participants—rates, fees, and repayment information—were absent from several of the websites. In
some cases, details like loan terms were found on Terms and Conditions pages or in FAQs. Note
that the lack of detail described here is typical of lenders that cater to higher-risk borrowers and
those that offer MCAs.
As noted earlier, on the websites of several online lenders included in this study, visitors must enter
their personal and business information in order to obtain information about the lenders’ products.
Some focus group participants that encountered such sites during the virtual shopping exercise
were frustrated by the lack of information:
“All these sites are a lot of clicking around and not getting
very far without providing information I’m not ready to
provide. I don’t want to be solicited for the rest of my life just
because I was looking for some information.”
“I hoped to see rates, terms and what I qualified for. [The
site] wouldn’t provide any information without an email or
contact info.”
“I couldn’t get info unless I signed in. I wanted to know how
much interest, and if I paid back quickly, was there lower
interest.”
Several participants cited concerns about lenders’ requests for information about their businesses
in online forms and the prospect of receiving solicitations as a result of providing this information.
Indeed, the lenders themselves are somewhat transparent about their intent to use the information
collected to make contact with the business. As shown in table 1, all of the companies include
some provision for users to grant permission to the lenders and lenders’ affiliates to contact them
using any information the lender collects. On some sites, the consent is described explicitly on the
15
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
application form; on others, consent is implicitly given, as described in the sites’ privacy policy or
terms of use pages. The consent provisions cover purposes that include communications regarding
applications and loans, but also marketing and sales of additional products.
More than three-quarters of the focus group participants reported receiving some type of contact
from online lenders in the past, either in the form of email, mail, phone calls, or offers. These
contacts, particularly the phone calls, were bothersome to the participants:
“I get these calls and emails almost every day. The worst
part is they almost never take ‘no’ for an answer.”
“I received 20+ calls a week after I secured a loan with [an
online lender].”
“I get calls twice a week and emails all the time. You just
want to shut it off and not be bothered by it.”
Online Lender Websites Vary in Cost Information Provided
Some sites provide more details about the features of their financing products than others.
13
However, even on websites with more information, specific details about repayment, fees, and other
items important to focus group participants were sometimes missing or not readily displayed. For
example, one lender featured in prominent bold print the “as low as” rate for a loan product, but in
a footnote, disclosed a far higher average rate for the product. A few lenders relied on footnotes to
convey key details about products, especially costs (see table 2).
13
This analysis covers companies’ business loans, merchant cash advances, and lines of credit. Certain specialized products
offered by some lenders, such as equipment leases and industry-specific loans, are not included.
16
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Table 2. Select details from online lender websites
Online lender
Location of cost
information
Product cost description* Additional fees
Company A On home page in box,
details in footnotes
Business loans: rates described as
a Total Annualized Rate; fixed rates
ranging from 5.99% to 29.99%
Origination fee: 1.99% to
8.99% of loan amount
Company B On home page in plain
text, details on product
pages in feature text and
in footnotes
Term loans: costs shown as simple
interest starting at 9% for short-term
loans and Annual Interest Rate (AIR)
starting at 9.99% for long-term loans
(both rates exclude fees).
Lines of credit (LOCs): costs shown
as Annual Percentage Rate (APR)
(starting at 13.99%, weighted average
is 32.6%)
Origination fee: up to 4%
of loan amount; monthly
maintenance fees on LOC
Company C Not provided Loans and lines of credit: no rates
or product costs are described
MCAs: factor rates usually between
1.14 and 1.48
No information
Company D On Rates and Terms page
in feature text, details in
footnotes
Loans: costs are described as a
monthly fee determined by the fee
rate, which ranges from 1.5% to 10%
Third-party partners may
charge up to an additional
1.5% per month
Company E Not provided Loans and MCAs: No rates or
product costs are described on the
website
3% origination fee (loans),
$395 admin fee (MCAs)
Company F On product page in plain
text
Working capital loans and MCAs:
factor rates as low as 1.15
Business expansion loans: interest
rates starting at 9.99% (not an APR)
Set-up or underwriting fee:
2.5% of loan total; Admin fee
up to $50/month
Company G On home page in feature
text, details in tables on
Rates and Fees page
Loans: costs shown as fixed annual
interest rate, ranging from 4.99% to
26.99%
Origination fee: 0.99% to
6.99%; late payment fee: 5%
of missed payment
Company H Not provided Loans and MCAs: No rates or
product costs are described on the site
No information
Company I Not provided Loans and MCAs: No rates or
product costs are described on the site
No information
Company J Not provided Loans and MCAs: No rates or
product costs are described on the site
No information
Note: Although all information shown is publicly available, company names have been anonymized, as this analysis is intended to describe
typical practices in the marketplace rather than to single out practices of individual companies.
* A factor rate is a rate used to calculate a borrowing fee, often expressed as a percentage of the borrowed amount and typically shown in
decimal form.
Source: Authors’ analysis of company websites, as of August, 2019.
17
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
The placement of product cost information on lenders’ websites varies from lender to lender. In
some cases, cost information—typically the lowest-available rate—is conspicuously displayed in an
upfront manner that would be highly visible to a user visiting the website. A few lenders prominently
advertise their costs in “feature” text, that is, in font that is larger than other text on the page, often in
bold or in an accent color. Lenders also may display the information as part of graphic features like
tables and boxes. By contrast, other lenders provide cost information in a way that is less visible to
users of the websites—for example, in plain text or in footnotes at the bottom of a page.
Focus group participants had mixed reactions to footnotes. Many were frustrated by fine print,
and said they thought lenders were trying to conceal information. Conversely, other participants
appreciated the additional information provided in the footnotes, after being unable to successfully
locate such details on some of the websites they encountered during their shopping exercise.
“Any company hiding things in fine print and buried in
paperwork should not be trusted.”
“Fine print [has] what I want to see. They’re being more
upfront and aboveboard about the reality of their loans.”
In some cases, footnotes and fine print contain information on fees that companies typically charge
for their products, aside from interest charges. These fees are most often for product origination,
but others include administrative fees, account maintenance fees on credit lines, or fees charged by
partners. Fees may be disclosed as a range of rates, flat monthly or one-time charges, or charges
“up to” a set percentage. Some lenders do not describe any fees on their websites.
The website analysis found significant variation in the terminology used to explain products’ costs.
As shown in table 2, two lenders provide costs in the form of an annual rate that excludes fees; a
third describes costs in APR terms for only one product, their line of credit. Several lenders describe
costs for at least one of their products using nontraditional terminology, such as a “factor rate,”
“fee rate,” or “simple interest.” Four lenders provide no rates or costs for any of their products. For
traditional term loans, product descriptions tend to be somewhat detailed, while descriptions for
MCAs include little or no information about the actual costs and repayment terms.
The variation in the product cost descriptions was confusing to focus group participants. They found
it challenging to determine products’ actual costs and to compare products when descriptions used
unfamiliar or varying terminology.
18
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
“It is difficult [to compare when] they are using different
models and different terminology.”
“They don’t like to use the word ‘interest,’ and they dress it
up in other ways to conceal the real cost of the loan.”
“I don’t know what a ‘factor rate’ is.”
“Full disclosure, like on credit cards or mortgages… is what
is necessary. They need to state the actual APR.”
Participants noted that the varying product descriptions provided no common basis for cost
comparisons, and several suggested that APR would be helpful for that purpose. In fact, determining
the equivalent APR on some products may be challenging, given the non-standard terminology and
structure of products offered by online lenders. Table 3 presents APR-equivalents for a common
scenario in which $50,000 is repaid in six months according to the terms and rates promoted on the
lenders’ sites.
Table 3. Estimated APRs for select online products
Rate advertised on website Product details Estimated APR equivalent
1.15 factor rate • Total repayment amount $59,000 Approximately 70% APR
• Fees: 2.5% set-up fee; $50/month
administrative fee
• Term: none (assume repaid in six
months)
• Daily payments (assume steady
payments five days/week)
4% fee rate • Total repayment amount $56,500 Approximately 45% APR
• Fee rate: 4% (months 1–2), 1.25%
(months 3–6)
• Fees: none
• Monthly payments
• Term: six-month term
9% simple interest • Total repayment amount $54,500 Approximately 46% APR
• Fees: 3% origination fee
• Weekly payments
• Term: six-month term
Source: Authors’ calculations, based on product descriptions on company websites.
19
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
The non-standard terminology also proved challenging for focus group participants trying to
compare online offerings with traditional credit products. For example, when asked to compare
a sample short-term loan product with a 9 percent “simple interest” rate to a credit card with a
21.9 percent interest rate, most participants incorrectly guessed the short-term loan to be less
expensive.
14
For another sample product—a $50,000 MCA with a factor rate of 1.2 and total
repayment of $60,000—focus group participants were asked for their guesses of an interest rate, if
the funds were repaid in one year. Interestingly, although all participants were presented with exactly
the same information about the product, they responded with a wide range of estimates, from 10
percent to over 50 percent.
15
Payment Arrangements Are a Source of Confusion
All companies described the frequency of required payments for their products, ranging from daily
to monthly payments. Fixed payments were most common for term loans. Payments on MCAs are
typically variable, as the payment amount usually fluctuates with sales volume. A few companies
provided no information on the payment structure for one or more products offered.
As shown in table 4, companies provide limited details on the impact of prepayment. A few note that
by prepaying, the customer incurs savings on interest (as they would with a traditional loan). Other
companies advertise that some borrowers may qualify for prepayment discounts on their remaining
financing charges. Still others provided no details regarding charges or savings associated with early
repayment.
Table 4. Select details on product repayment from online lender websites
Online lender Payment amount and frequency Term length (loans only) Prepayment
Company A Fixed monthly payments 1–5 years Interest savings
Company B Fixed daily or weekly payments 3–36 months “Potential interest
reductions”
Company C Loans: fixed daily, weekly, or monthly
payments
MCA: variable daily or weekly
payments based on sales volume
LOC: daily or weekly payment (fixed
vs. variable not specified)
3–60 months Not specified
14
See Lipman and Wiersch, Browsing to Borrow, 18 (sample Product B). According to the product description, Product B
has a 3 percent origination fee and requires weekly payments.
15
See Lipman and Wiersch, Browsing to Borrow, 18 (sample Product C). Note that although interest owed on this product is
20 percent of the principal value, the effective rate, assuming daily payments and steady sales, would be on the order of 40
percent.
20
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Company D Monthly payments in set amounts
established at loan origination
6–18 months Savings on monthly fees
implied
Company E Loans: fixed daily payments
MCA: variable daily payments based
on sales volume
6–18 months Discount available on loans
repaid within 90 days of
origination
Company F Loans: fixed daily or weekly payments
MCA: variable daily payments based
on sales volume
6–24 months Not specified
Company G Fixed monthly payments 6 months to 5 years Interest savings
Company H Loans: daily or weekly payments (fixed
vs. variable not specified)
MCA: variable daily payments based
on percentage of sales
4–24 months Discount available on loans
repaid within 100 days of
origination
Company I Loans: biweekly payments (fixed vs.
variable not specified)
LOC: fixed monthly payments
Up to 4 years Interest savings
Company J Loans: fixed daily or weekly payments
MCA: variable daily payments based
on percentage of sales
Up to 18 months Not specified
Note: Although all information shown is publicly available, company names have been anonymized, as this analysis is intended to describe
typical practices in the marketplace rather than to single out practices of individual companies. MCA is a merchant cash advance and LOC is
a line of credit.
Source: Authors’ analysis of company websites, as of August, 2019.
Early repayment on products with fixed payback amounts was particularly confusing for focus
group participants. Using the same sample MCA described above—an advance of $50,000 with
a repayment amount of $60,000 paid back with a small percentage of daily credit card sales—
participants were asked the impact of higher-than-expected sales on the repayment of the advance.
While most participants correctly noted that repayment would occur more quickly, their expectations
regarding the effect on their interest rate were varied:
“I would definitely plan to [pay] the loan back much sooner
and have a lesser repayment amount.”
“The stronger [your] sales the faster you could pay off the
loan which would in effect lower the interest rate.”
Importantly, some participants, accustomed to traditional consumer products, expected that their
interest or financing charges would be reduced by repaying quickly. In fact, faster repayment would
increase the effective interest rate and would not reduce the $60,000 amount owed.
21
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Comparing Online Lender Websites to
those of Banks and Payments Processors
To provide a frame of reference for the findings from the analysis of online lenders’ websites,
the authors conducted similar systematic reviews of two other groups of lenders: (1) payments
processors that provide small business credit, and (2) commercial banks that offer their own small
business credit products online.
Payments processors: This study looked at the two major payments processors that offer credit
to their small business customers. Though these companies are among the largest online lenders,
they are excluded from the set of online lenders analyzed in this study for several reasons. First,
these companies lend exclusively to their existing customers by making customized offers to their
merchants based on the data they already collect on sales processed through the platforms (sales
data as well as inflows and outflows to and from the merchants’ accounts). Therefore, key elements
of the website analysis undertaken for this study are not relevant, as the companies already have
their customers’ data. Furthermore, these lenders communicate product information to their
customers through the credit offers themselves; therefore, the content on the websites serves a less
critical role in informing the prospective borrower.
That said, issues around the comparability of products are relevant for the payments processors, as
would-be borrowers may have a need to compare offers of credit from these companies to products
available at other online lenders, or to other options such as credit cards.
The payments processors, like many other online lenders, use non-standard cost structure and
product terminology. In some ways, their products are hybrids of MCAs and loans. Like an MCA, the
products feature a fixed repayment amount, and further, the credit is repaid through swipes of daily
sales receipts, so payment amounts vary with sales volume. However, like a term loan, these lenders
require loans to be fully repaid in a set number of months, regardless of sales activity. The lenders
may require periodic supplemental payments if sales are slow.
Focus group participants were shown a sample product like that offered by one of the payments
processors. For the sample loan, the borrower chooses a “repayment percentage,” that is, the
portion of their daily sales devoted to repayment, and borrowing costs are set accordingly.
16
The
terminology and the corresponding change in cost were confusing to many focus group participants.
Some appeared to equate the repayment percentage with an interest rate.
16
Lipman and Wiersch, Browsing to Borrow, 16 (Product A).
22
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
“It doesn’t make sense that if the fee is 30%, the
[repayment] amount is lower.”
“What are the monthly installments?”
“The interest rates are not published so you have to
calculate yourself.”
“I feel like they are trying to hide the true cost of the loan.
Just tell me the % interest.”
“I’m not interested in paying that high of fees. The minute I
saw 30% I was turned off.”
Commercial Banks: Again for comparison purposes, this study considered the manner in which
credit products’ costs and features are communicated on bank websites. For a suitable comparison,
the five banks identified for the study offer small business credit and an online application process.
Their online products are loans and lines of credit, generally unsecured, and typically up to
$100,000.
17
In their advertising, these banks placed far less emphasis than online lenders on easy credit, and
as a general rule, the minimum qualifications described were more stringent. In addition, the banks
downplayed their speed of funding and processing times. The two banks that do reference funding
times specify a week to 10 days.
As with online lenders, the analysis finds considerable variation across the bank sites in the level
of detail provided. Three of the five banks provided cost information for their credit products; two
provided none. Among the three that did give more thorough product information, the products
tended to be traditional term loans with fixed monthly payments, and were described using familiar
terminology. Costs were described using an annual interest rate, such as prime plus a fixed percent.
Similar to online lenders, the banks featured their “as low as” rates, and some cost details were
conveyed in footnotes and FAQs.
17
Websites were reviewed in August, 2019. One institution offers secured loans and lines of credit only, and one offers
unsecured loans up to $250,000.
23
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Tracking Website Visitors
As stated in the introduction, a goal of this study was determining the extent to which online lender
website visitors are tracked. In addition to the collection of customer data through the use of forms,
described earlier, lenders have robust tools for tracking and identifying customers. Some of these are
generally imperceptible to customers, though a few of the small business focus group participants
expressed concerns about their privacy during the virtual shopping exercise and in their prior
experiences:
“I was wondering if my IP address was being tracked
because I was getting solicitations through my email while
researching.”
“I just feel violated because I never applied for any loans.
It’s a scary feeling wondering how these people get your
information.”
Companies use “trackers” to collect data on prospective customers. When installed on a lender’s
website, trackers collect identifying information about website visitors and attempt to match them
to known businesses or owners, using data from a variety of sources including Facebook, Amazon,
Twitter, LinkedIn, and other common web platforms.
18
The profiles may contain information like
company name, address, and internet activity, as well as more sensitive data including financial
information and owner demographics. So, even when visitors do not share identifying information
with the lender, embedded trackers may collect this information, as well as data on how visitors
navigate the lender’s website and other sites they visit. Such details can then be shared with data
aggregators to build a more complete profile.
The analysis of trackers on lender websites utilized Ghostery, an open source browser extension,
to measure the extent to which visitors are tracked on websites using embedded trackers. The
Ghostery tool analyzes every network request (e.g., clicks) generated on a specific web page and
then matches the outgoing URL patterns against a database of known trackers to determine which
trackers are present on the website (see figure 1).
19
The analysis finds that third-party trackers are
commonly used by both online lenders and banks, though the online lenders were more likely than
18
See, for example, Wolfie Christl, Corporate Surveillance in Everyday Life: How Companies Collect, Combine, Analyze,
Trade, and Use Personal Data on Billions (Vienna: Cracked Labs, June 2017), https://monoskop.org/images/b/ba/Cracked_
Labs_Corporate_Surveillance_in_Everyday_Life_2017.pdf. See also, Katharine Kemp, “Getting Data Right,” Center for
Financial Inclusion at Accion (blog), September 27, 2018, https://www.centerforfinancialinclusion.org/getting-data-right.
19
The analysis does not include websites’ use of so-called “zero day trackers,” which are designed to be undetectable.
24
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
the banks included in this study to have trackers in greater numbers. Each of the 10 online lender
websites used at least eight trackers, and most used several in each category.
Figure 1. Use of trackers on select online lender and bank websites.
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Payments Processor 1
Payments Processor 2
Bank 1
Bank 2
Bank 3
Bank 4
Bank 5
0 5 10 15 20
Number of trackers
Essential
Site analytics
Customer interaction
Social media
Advertising
Note: Key identifies bars in order from left to right. Company names have been anonymized; the order in which they are listed here does not
correspond with the order in tables 1, 2, and 4, or with the order in footnote 10.
Essential includes tag managers, privacy notices, and technologies that are critical to the functionality of a website.
Site analytics
collects and analyzes data related to site usage and performance.
Customer interaction includes chat, email messaging, customer support, and other interaction tools.
Social media integrates features related to social media sites.
Advertising provides advertising or advertising-related services such as data collection, behavioral analysis, or retargeting.
Source: Federal Reserve Board analysis, as of September, 2019
Lenders use trackers much the way other companies do—to collect as much information as
possible about each visitor in order to customize visitors’ experiences and reach them through
targeted advertising. However, privacy experts as well as small business advocates have suggested
that data collected through trackers may be used along with the other alternative data (such as cash
flow, invoicing, and shipping information) that online lenders employ in their algorithms to underwrite
and price offers of credit.
20
20
See Christl, Corporate Surveillance in Everyday Life, 53. Also see FinRegLab, The Use of Cash-Flow Data in Underwriting
Credit (September 2019), https://finreglab.org/wp-content/uploads/2019/09/FinRegLab-Small-Business-Spotlight-Report.pdf.
25
Implications and Policy Questions
As discussed earlier in the analysis of product descriptions on companies’ websites, the online
lenders varied significantly in the amount of information provided, especially on costs. Lenders that
offer term loan products were likely to show costs as an annual rate, while others use nontraditional
terminology to convey costs. Still others, particularly those that offer MCAs, provide no information at
all. That said, virtually all the sites focus on the ease of applying and qualifying for funding, the speed
at which applications are approved, and the array of uses for loan proceeds.
The study also found that, in many cases, prospective borrowers must furnish information about
themselves and their businesses in order to obtain details about product costs and terms. This
information, as well as other data collected on website visitors through the use of trackers, may be
used to build profiles of small businesses.
These practices, coupled with relatively low satisfaction rates shown in the SBCS, raise
concerns that some borrowers may be opting for credit products that are not well-suited for their
businesses—even in some cases, putting their businesses at risk.
21
Merits of Standardized Disclosures
The debate about small business borrower protections and product disclosures has accelerated
recently with California enacting truth in lending legislation applicable to small business online
lenders—an action being considered by other states.
22
At the national level, legislators, regulators,
and policy advisory groups continue discussions about whether and how to address concerns in
small business lending.
23
Also, some in the online lending industry itself continue their efforts to promote standardization of
disclosures. In 2016, several lenders in coordination with a nonprofit organization, launched the
SMART Box disclosure initiative, aimed at developing a format for voluntary disclosures in loan
documents that would present total cost of the loan, APR, and other repayment terms. The effort
21
Record of Meeting, Community Advisory Council and the Board of Governors (October 5, 2018), 7, https://www.
federalreserve.gov/aboutthefed/files/cac-20181005.pdf: “The Council notes a growing trend among small business owners
getting into trouble with expensive online small business loans, such as merchant cash advances (MCA). Oftentimes, the
pricing and structure of these loans [are] deliberately obscured, and small business owners take on debt burdens and fees
that they are not able to sustain.”
22
California SB-1235, “Commercial Financing Disclosures,” was signed into law on September 30, 2018. As of this writing, it
has not yet been implemented as the California Department of Business Oversight is adopting regulations. The New York
and New Jersey legislatures are considering similar bills.
23
See, for example, U.S. House of Representatives, Committee on Small Business, “Financing through Fintech: Online
Lending’s Role in Improving Small Business Capital Access,” hearing held October 26, 2017, https://www.govinfo.gov/
content/pkg/CHRG-115hhrg27255/html/CHRG-115hhrg27255.htm. See also, the Bipartisan Policy Commission report
Main Street Matters: Ideas for Improving Small Business Financing (August 2018), https://bipartisanpolicy.org/report/
main-street-matters-ideas-for-improving-small-business-financing/.
26
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
is voluntary and, as of this writing, an updated version of the SMART Box is being considered.
24
It
is the case, though, that the required inclusion of APR for products is a point of contention in the
industry.
Some lenders argue APR should not apply to small business products with variable payments and
no fixed term, such as MCAs. However, small business advocates suggest that APR is important
for cost comparisons with other products, including consumer products like credit cards and home
equity lines of credit that are often used to finance small businesses. Furthermore, APR is a familiar
metric. Prospective borrowers generally are aware from their experiences with consumer products
what constitutes a high APR.
It seems apparent that clearer descriptions of products and, in particular, their costs would position
small business owners to make better borrowing decisions. That said, research suggests that
borrowing decisions are not always driven by costs. For example, while among the focus group
participants, “best price” was the most commonly mentioned top factor in their choice of lender,
“quick and easy loan application process,” “a lender I know and trust,” and “likelihood application will
be approved” were primary considerations for others. Similarly, the SBCS finds that several factors—
including the likelihood of approval and speed of the decision and funding—are more important than
cost for online lender applicants in their choice of a financing source. Therefore, clearer information—
in the form of standardized disclosures—will not necessarily alter the decisions of some small
business borrowers about whether and where to obtain financing.
Even so, the clear disclosure of product costs and terms could help many of these business owners
make informed decisions about the amounts they borrow, cash flow management, early repayment,
and repeat borrowing. Focus group participants reacted favorably to a sample disclosure box
with total cost of capital, the term, payment frequency, APR, average payment amount, and basic
information about prepayment.
25
Their comments indicated that such information, presented clearly
and in a standard format, would be very useful for product comparisons. A majority of participants
commented that APR was among its most helpful details. The repayment amount, frequency of
payments, and prepayment penalties were also cited as important.
When small business borrowers receive disclosures may be nearly as important as what is disclosed.
Nearly all focus group participants said they would want clear upfront information to help them make
borrowing decisions, stating they would want the level of detail that is provided in the disclosure
as early as possible in the process. Many remarked that presenting the product rate and terms at
loan closing is too late, as they have already invested time in the application process, shared their
financial data with the lender, and may have already committed the expected loan proceeds.
24
Two of the lenders included in the website analysis are SMART Box adopters and both present sample SMART Boxes on
their websites, showing rates that are nearly the lowest offered by these lenders. According to their websites, one lender
provides the SMART Box at the time credit is offered; the other includes it with the loan agreement. For more information on
the SMART Box Model Disclosure Initiative, visit http://innovativelending.org/smart-box/.
25
Lipman and Wiersch, Browsing to Borrow, 22.
27
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
To this end, much as technology has introduced efficiencies and increased the speed of lending,
technology-based solutions may be leveraged to inform borrowers early in the process. For example,
one focus group participant suggested lenders make interactive tools available on their websites that
would enable small business owners to input their information (e.g., credit scores, monthly sales,
years in business) to see—upfront—the average interest rates and terms for a business like theirs.
In sum, greater transparency and early disclosure would enable business owners to determine
which lenders offer products with rates and terms they would find acceptable, and would encourage
prospective borrowers to explore additional financing options and make informed comparisons.
Privacy Concerns and Business Owners’ Data
This study considers the level of information about products and their costs that small business
owners can access without providing the lender with information about themselves or their
businesses. Indeed, there is a “cost” to the business incurred by sharing their information to request
a quote or start an application. In addition to exposing their business to a potentially burdensome
number of phone calls and a flurry of marketing content, some lenders run credit checks early in the
process, even if the business owner is just shopping rates. A few of the focus group participants
voiced concerns about this practice and the potential impact on their credit scores. Furthermore,
while many of the participants in the most recent focus group study appeared resigned to the
potential for data breaches with any financial services provider, some were particularly concerned
about the security of their information with online lenders. As a practical matter, providing personal
and business information to numerous lenders simply for the purpose of comparison shopping is
certainly not ideal from the standpoint of preserving a prospective borrower’s privacy. Such concerns
may limit a prospective borrower’s willingness to explore all their options.
The analysis in this report on the use of website trackers by small business lenders only scratches
the surface on issues regarding privacy and use of data collected. Though the use of trackers is
widespread in many industries, there are unique issues associated with the use of data by lenders.
Little is known about online lenders’ underwriting algorithms and the data they employ. Small
business advocates have voiced concerns that data collected surreptitiously through trackers may
be matched with data from third-party sources to identify individual business owners. It is unclear
whether these data are used to underwrite and price offers of credit.
26
However, this potential use
of alternative data raises questions about how such practices could amplify—or perhaps mitigate—
concerns about fair lending.
Questions for Future Research and Analysis
The lack of data on small business lending remains a critical issue that hampers the ability of
lenders and policymakers to make informed decisions about lending and policy. Nonbank lending
is a particular blind spot, as comprehensive data for the online lending industry are not available.
27
26
See Christl, Corporate Surveillance in Everyday Life, 53.
27
Section 1071 of the Dodd Frank Act amended the Equal Credit Opportunity Act to require that lenders gather information
on credit applications made by small businesses, and women- or minority-owned businesses. As of this writing, this
requirement has not yet been implemented by the Consumer Financial Protection Bureau.
28
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites
Policymakers would benefit greatly from data on outcomes for small business credit applicants
and borrowers to strengthen understanding of the impact of being denied credit, and how firms
fare after securing credit—either from traditional or alternative lenders. Such insight would benefit
organizations that serve small businesses and the business owners themselves, as they make
borrowing decisions.
For online lenders, specifically, greater insight is needed on the information disclosed to prospective
borrowers throughout the entire application process, that is, beyond the shopping phase. As
small business applicants receive actual offers of credit from online lenders, are they given clear
information that is sufficient to support decisionmaking? Furthermore, are the credit agreements,
presented to business owners at closing, explicit about costs and terms? Do borrowers have a
clear understanding of their obligations and any possible penalties?
With public attention now focusing on the potential benefits of standardized disclosures, it is
worth further exploring the impact on borrowers of more transparent, comparable, and complete
information. Could greater transparency improve borrowers’ satisfaction levels and their trust in
online lenders? And ultimately, how would better information help owners make the borrowing
decisions that best help their small businesses thrive and grow?
