When Comparing Loan Options, Small Business Owners Say “Total Payback Amount” is Easiest to Understand; APR and Factor Rate More Difficult

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Lendio sponsors independent survey of over 1,000 small business owners; finds SMB’s decision to accept loan depends on how cost is presented

The fact that small business owners overwhelmingly said ‘total payback amount’ was the easiest metric for them to understand suggests that as an industry we should be cautious about pushing a one-size-fits-all format onto the small business owner.

Lendio, the nation’s leading marketplace for small business loans, today released new survey data indicating that small businesses find “total payback amount” the easiest way to understand the cost of capital associated with a business loan. The survey also showed that potential borrowers’ decisions are significantly affected by the way loan cost is shown, especially with short-term loans, even when there’s no difference in the actual cost of capital.

A random sample of more than 1,000 small business representatives across the U.S. were presented with the following lending scenario: “Your small business has an opportunity to permanently increase monthly revenue by $5,000, but you will need a $20,000 loan to capitalize on the opportunity. Based on your business financials, collateral, and credit score, you were only approved for one three-month term loan.” The survey then presented the cost of the loan in three ways, in randomized order:
● As an APR
● As a factor rate (i.e., $1.XX for every dollar borrowed)
● As a total payback amount ($20,000+ for the $20,000 borrowed)

Asked which method was easiest to understand, two-thirds of respondents chose total payback amount; only 17.4 percent chose APR and 15.3 percent chose factor rate.

“With so many products out there, seeking the right loan and understanding the cost to your small business is a daunting task,” said Brock Blake, CEO and co-founder, Lendio. “The fact that small business owners overwhelmingly said ‘total payback amount’ was the easiest metric for them to understand suggests that as an industry we should be cautious about pushing a one-size-fits-all format onto the small business owner. Depending on the type of loan product and length of term, the presentation of the cost of capital that allows borrowers to best comprehend the true cost associated with their lending option may differ.”

Respondents were also asked whether they would take the loan or not (and were not told that in all three cases the cost of capital was mathematically equivalent). The survey tested the validity at three “price points” including APRs of 12 percent, 36 percent, and an extreme at greater than 100 percent.

“Not surprisingly, the higher the APR, the less likely businesses were to take the loan,” Blake noted. “But, what was most striking is that at all price points businesses were less likely to take the loan when it was expressed as an APR. While most people are familiar with APR, loan structures differ and when they do, APR may not be the most accurate way to represent the true cost of a loan, particularly for loans with terms shorter than a year.”

According to the survey:
● How the cost of capital is expressed has a dramatic impact on whether or not the borrower takes a loan.
● Two-thirds of business owners agree that total payback amount is the easiest format to understand the cost of a loan.
● At all price points presented, small businesses were less likely to accept a loan when the cost was expressed as an APR, rather than factor rate or total payback amount.

“Our data shows that lenders and marketplaces have an important role to play in helping borrowers find and evaluate loan products that fit their unique needs,” Blake continued. “With small businesses accounting for 64 percent of new jobs and more than half of our gross domestic product, we should be working to help them fully understand the true cost of their capital options so that they can make informed decisions that will aid in their growth and stability.”

About the Survey
Between January 29 and March 17, 2016, Lendio sponsored an independent survey to small business across the United States. Questions were presented in random order. More than 1,000 respondents represented a cross section of American small business owners across education level, geography, income, etc.

About Lendio
Lendio is a free online service that helps business owners find the right small business loans within minutes. The center of small business lending, our passion is fueling the American Dream by uniting the small business loan industry and bringing all options together in one place, from short-term specialty financing to long-term low-interest traditional loans. Our technology makes small business lending simple, decreasing the amount of time and effort it takes to secure funding. More information about Lendio is available at http://www.lendio.com.

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Brenda Armstrong
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