Alternative Lending through the Eyes of “Mom-and-Pop” Small-Business Owners

The online alternative lending industry is reportedly growing rapidly, and recent surveys indicate that small businesses are increasingly borrowing from these online sources that tout quick funding and less-stringent borrower requirements. While this industry holds promise for expanding access to credit, it also raises potential risks for small-business borrowers as these products can be considerably more expensive than traditional credit.

To study these developments, authors Barbara J. Lipman of the Federal Reserve Board and Ann Marie Wiersch of the Cleveland Fed set out to gauge small-business owners' perceptions of online alternative lenders. Their study was conducted using online focus groups, each with 22 small-business owners and decision makers. The online discussion format of the focus groups allowed for the collection of detailed responses as well as insights into the complex decision processes of potential borrowers. The study reveals that the participating small-business owners were open to borrowing from online alternative lenders, but also noted some areas of concern.

The report, which includes an overview of the online alternative lending industry, information about the study, and detailed observations from focus-group participants, highlights three main findings:

• Online alternative lender websites are alluring, but trigger concerns about data security and privacy.
• Virtually all the focus-group participants said they want clearly stated product features and costs and an easier way to compare product offerings.
• Using information typically provided on online alternative lender's websites, small- business owners find it difficult to compare credit products.