At Large Banks, 61% of Small-Business Applicants Named an Existing Relationship. At Online Lenders, 64% Named Speed

Federal Reserve survey data on why small employers chose the lender they applied to: at banks, a relationship they already had; at online lenders, speed.

Why owners walk into a bank

The Small Business Credit Survey, run by the twelve Federal Reserve Banks, asks firms that applied for financing what led them to each lender, and lets them name more than one reason. At banks the answer is lopsided. Of the employer firms that applied at a large bank, 61% named an existing relationship with the lender; the next most common reason, the chance of being funded, was named by 37%. At small banks the figures were 62% and 33%. Large and small banks are statistically level on this; both are clearly above online lenders (31%), finance companies (32%) and community development lenders, CDFIs (16%).

Firm size shows up at small banks. Among firms with 1 to 4 employees that applied at a small bank, 54% named a relationship; among firms with 50 to 499 employees, 86%, a gap the survey’s margins of error can separate. At large banks the size pattern is not clear enough to call.

At a bank, most applicants were already known there. At an online lender, most named speed.

Why they go online instead

The reasons flip at online lenders. 64% of applicants named the speed of the decision or the funding, against 29% at large banks and 28% at small banks. 49% named the chance of being funded and 38% that no collateral was required. Applicants at finance companies, which include equipment dealers and auto finance companies, named speed at 44%, more often than at either kind of bank. At credit unions the two most-named factors were a relationship, 49%, and cost or interest rate, 43%, well above the 18% at online lenders. At CDFIs, a recommendation or referral was named by 37%, more than at either kind of bank.

The applicants who had already heard no

One answer on the list is not about the lender at all. 28% of firms that applied at an online lender said being denied by another lender was a factor in applying there, against 12% at large banks and 11% at small banks. The finance company figure, 18%, cannot be told apart from the online one in this survey. The survey does not say which lender turned them down or why.

What to take from this if you will need to borrow

Most owners who applied at a bank in the year before the survey went to one that already knew them. Most of those who applied online named speed, and 28% said a denial elsewhere was a factor. None of that says a relationship gets you approved; the survey asked why firms chose a lender, not what the lender decided. What it does say is where the people who chose banks started from. If your business has no lender that knows it before you need the money, the realistic question is which door you will be walking through when you do, and whether speed will be the reason.

Three limits worth holding. These are employer firms that applied for a loan, line of credit or merchant cash advance in the prior twelve months, not all businesses. A firm that applied at two kinds of lender answers for each. And the shares are reasons named, not ranked: respondents could pick several, so they do not add up.

Published by The Lonely Entrepreneur — the community and coaching platform for entrepreneurs who are building alone. lonelyentrepreneur.com

This article is for educational purposes and is not a substitute for professional financial or legal advice.