Small-Business Financing Trends: The Rise of Online Lenders vs. Traditional Banks
Small-business owners are increasingly turning to online lenders rather than traditional banks for financing, according to the 2026 Report on Employer Firms. The report reveals that 60% of small-business owners sought financing in the past year, with 29% opting for online lenders, a significant increase from previous years. In contrast, only 28% of owners sought loans from small community banks, while 41% applied to large banks, indicating a shift in lending preferences among small businesses.
The rise in online lending is attributed to larger banks redirecting their funds to nondepository financial institutions (NDFIs), which then lend to small businesses at a markup. This trend has led to a substantial increase in loans to NDFIs, with U.S. banks lending over $1 trillion to these institutions by the third quarter of 2025. While this strategy offers benefits such as efficiency and faster lending decisions, it also results in higher borrowing costs for small businesses.
Small-business loans at larger banks grew by only 1% in 2025, compared to the 4.1% growth in overall large bank loans. The concentration of NDFI lending is particularly high among banks with assets exceeding $100 billion, indicating a shift towards optimizing efficiency rather than underwriting individual small-business loans. This trend has implications for small businesses, as they may face stricter criteria and higher costs when obtaining loans from non-bank private lenders.
Despite the convenience and speed of funding decisions offered by online lenders, small businesses often face higher borrowing costs than expected. Data from the Federal Reserve shows that applicants with medium to high credit risks are more likely to apply to online lenders, but they may encounter unfavorable repayment terms and high interest rates. In contrast, small businesses working with traditional banks, including small banks and credit unions, reported higher satisfaction rates and lower borrowing costs.
The choice between traditional banks and online lenders can significantly impact small businesses' financial outcomes. While online lenders offer faster approval rates, they also come with higher borrowing costs and less favorable repayment terms. Small businesses must carefully consider their financing options to ensure they choose the most efficient and cost-effective solution for their needs. In a landscape where access to credit is crucial for small businesses, understanding the implications of different lending sources is essential for making informed financial decisions.