Lending to small Businesses

Both the Federal Reserve Board and the Federal Reserve Bank of Cleveland recently published the results of a survey on financing alternatives for small businesses in a paper entitled "Browsing to Borwer: Mom & Pop' Small Business Perspectives online Lenders", which is available here. Findings from the survey provided a revealing look at the concern of small entrepreneurs about on-line financiers, owners' favourite financing source and what they expected from a financier.

Small companies involved in the survey had at least one, but no more than 20 staff and less than $2 million in sales annually. In the last 12 month, all respondents had purchased loans for their company. There were two seperate focal groups with a group of 42 small company attendees.

Shopkeepers replied that they favoured conventional creditors, although many of them were frustrated by long licensing procedures and challenging levels of inerwriting. In addition, when selecting between on-line fund companies, property managers favoured those who provided more information in advance about their product and prices before the property owner started the claim procedure. Proprietors were consistently frustrated with repeat and unrequested referrals by on-line financiers - but some still kept information for later use.

Price transparency also affected homeowners, some of whom felt that lenders were trying to hide the real cost of their product by omitting fundamental information or using unknown concepts such as 'simple interest' or 'factor rate'. Based on this request, the author of the report concluded with "Confusion Prevails" when they discussed the owner's settlements of a commercial interest-bearing loans, a short-term loans and a split-processing dealer bar-front.

Proprietors found it difficult to determine interest rate or cost of product; found product description and vocabulary bewildering; voiced "annoyance" with important words that appeared in the small print; and made erroneous product beliefs on the basis of their experiences with more conventional inks. In addition, the survey presented model disclosures to the owner.

In general, the proprietors reacted positively and were "almost unanimous" in their wish to obtain the revealed information, which consisted of the amount of the loan, the amount to be repaid, the duration, the overall costs of the principal, the annual yield, the annual mean rate of return, the cent on the US dollars and the conditions for advance payments. Proprietors also suggested clarifying information and standardising language. Overall, the results of the survey suggest that the way in which a financier presents information to property holders influences the products of property holders and the choice of financiers, thus influencing the investor's businesses and results.

While donors often concentrate on the threat of regulatory risk when assessing disclosure and regulatory structures, the report points out that in an overcrowded market, donors can distinguish themselves through clear disclosure.