Fed Study Finds Inconsistent Advertising of Nonbank Small Biz Loan Terms

The way nonbank online lenders advertise or disclose up-front loan terms and costs for small businesses varies greatly, producing confusion for small business borrowers as online lending gains market share, according to research published Thursday by the Federal Reserve Board and the Federal Reserve Bank of Cleveland. Although term loan costs were often quoted as annual rates, other lenders used terminology likely to be unfamiliar to borrowers or did not describe costs on their sites. Very few companies offered rates for merchant cash advances.

The study also raised concerns about a practice at several nonbank online lenders that required borrowers to enter their personal and business information just to gain basic loan pricing information. “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,” the study said. “Furthermore, businesses could be subjecting their data to use by lenders and other third parties.”

The Fed compared the nonbank online lenders to websites of a group of banks that offer small business loans via an online application. “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,” the study found. “In addition, the banks downplayed their speed of funding and processing times.” Banks saw variation in whether they described product costs up front.