Association for Public Policy Analysis & Management

Issue:  The marketplace for small dollar lending to small businesses is in the midst of transformation.  Online alternative lenders (e.g., CanCapital, OnDeck, Lending Club, Kabbage, PayPal) offer small dollar, small business products including cash advances, online lines of credit, loans repaid on a daily basis, and more traditional term loans. Technology and online platforms are changing everything from underwriting, to loan pricing, to loan delivery, to loan servicing.  In short, online small business lending is a growing, crowded and potentially confusing marketplace.  The industry holds great promise for increasing affordability and access to credit, but also raises potential risks for small business borrowers. Typical surveys of small businesses do not ask about their decision to consider online lenders nor do they probe small businesses’ trust, understanding, or overall perceptions of these alternatives. An online focus group of small business potential borrowers was carried out to help shed light on these issues. 

Methodology: An online focus group is an especially effective way to convene a group of geographically dispersed and busy small business respondents.  In this case, small businesses (“Mom & Pops”) with 2 to 20 employees were targeted – a group particularly hard to reach with a face-to-face focus group.  Two national online focus groups were conducted in which 44 small business participants came to an Internet site, logging on one to three times a day over a period of three days to respond to questions facilitated by a professional moderator. Mock loan product descriptions and other items were posted on a virtual “whiteboard” for evaluation and participants also were asked to visit the websites of online lenders and share their impressions. 

Findings:  The study revealed that:

• Online lender websites are alluring, but raise data concerns.  Small businesses’ initial top of mind impressions of online lenders tended to be negative.  Interestingly, attitudes shifted somewhat to positive after participants visited actual websites. This suggests online lenders know their target audiences well and cater to their desire for ease and simplicity.  However, the websites’ collection of businesses’ information for marketing and underwriting raised data security concerns and was a turn-off for many participants.
• Small businesses find comparing products difficult.  Although participants initially said it was “easy” to evaluate loan products, many expressed uncertainty or answered questions incorrectly when making specific product comparisons, particularly on cost.  Most want clearly stated product features and an easier way to compare product offerings.
• Small businesses appear to view “online” as a place, rather than a category of lending.  Researchers and analysts tend to segment online loan products into specific types.  However, small businesses view online as a place to shop for a variety of both alternative and traditional loan products – a finding with important implications for future quantitative work on this topic.