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Small-Business Loans: Few Shop Around

June 25, 2015
Small Business
Small-Business Loans: Few Shop Around
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Most entrepreneurs don’t bother to shop for the best small-business loans even though they now have more financing options, a new study says.

Many small-business owners also turn mainly to traditional banks or credit unions for information on the best options for securing a loan, according to the report from Lending Tree, an online lending platform.

These business owners may be “missing out on potential savings by simply not shopping around for the best interest rate and comparing lenders,” the company said in a statement.

The study was based on a survey of 170 small-business owners in the United States who had applied for a loan in the past 12 months.

More than half of those surveyed, or 58%, said they “did not comparison shop business loans online during their application process.”  Most, 61%, also went “directly to a bank or credit union” to check out small-business loans and other financing options.

MORE: More Lenders Are Saying Yes to Small-Business Loans

The findings come amid major changes in the small-business lending market, where alternative lenders are an emerging force. They’re offering small businesses easier and quicker ways to secure financing compared with traditional banks, although some loan products carry higher interest rates.

That shift follows the 2008 financial crisis, when small-business lending by traditional banks and lenders plummeted.

The Lending Tree report echoes another study published in 2014 by National Funding and Northwestern University’s Kellogg School of Management. It found that many small-business owners tend to do business with the first lender they meet.

“Traditionally, a small-business owner will seek financing from the first source that they feel they can get financing from,” National Funding CEO David Gilbert tells NerdWallet. “They tend not to shop for financing options. The process is rigorous. They don’t have the energy to do that.”

David Goldin, chief executive of alternative small-business lender AmeriMerchant, also says the study’s findings are not surprising.

Entrepreneurs, he says, want to address the financial needs of their business quickly, so they are less likely to devote their limited time to shopping around.

“For small businesses, their most precious asset is their time,” he tells NerdWallet.

The Lending Tree report also underscores the importance of longstanding relationships when it comes to small-business financing.

In the study, 51% of small-business owners said they had established trust with their lender. But only 9% said they valued the brand reputation of their lender.

That’s why it’s important for alternative lenders to reach out to business owners to let them know of other options. “We spend a lot of money on marketing and advertising,” Goldin says.

Gilbert of National Funding also stressed the importance of marketing for alternative lenders. “Banks have been around for a hundred years. Alternative lending has been around for about a decade,” he says. It’ll take time for alternative lenders to become a familiar option for small business owners, he says. “There’s currently no Bank of America in our space.”

The good news is that “once they communicate with you, you have a better shot at working with them because they don’t shop.”

To get more information about funding options and compare them for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Benjamin Pimentel is a staff writer NerdWallet, a personal finance website. Email: [email protected]. Twitter: @benpimentel.

Image via iStock.