Six in Ten Online Business Borrowers Say the Cost Surprised Them. Ten States Are Now Trying to Fix That

The Federal Reserve Banks' 2026 Report on Employer Firms, released in March 2026 and based on a survey of 6,525 small employers fielded in the fall of 2025, found that 60% of businesses that borrowed from online lenders said their actual borrowing costs were higher than they expected. Only 4% said costs came in lower. Borrowers who used small banks and large banks reported the same surprise far less often — 37% and 32%, respectively.

That gap is the single most useful data point a small business owner can carry into a financing conversation this year. It is not evidence that online lending is bad. It is evidence that online lending is priced in a format most owners are not used to reading.

Where small businesses are actually borrowing

The same survey provides context. Eighty-six percent of small employer firms use financing on a regular basis, with credit cards and loans the most common products. Sixty percent applied for financing in the twelve months before the survey — most often to cover operating expenses (56%) or to fund an expansion or a new opportunity (46%).

Outcomes were mixed. Forty-two percent of applicants received the full amount they sought, 36% received some or most of it, and 22% received nothing at all.

Where owners applied has shifted meaningfully. Applicants most often went to large banks, followed by online lenders and then small banks — and the share of applicants seeking financing from online fintech lenders has climbed from 17% in the 2020 survey to 29% in the 2025 survey. Nearly a third of small business credit applications now touch a non-bank online lender.

Approval odds ran the other direction. Applicants at small banks were fully approved at a 57% rate — higher than at any other lender type. Online lender applicants were also more likely to report problems with their lender, with high interest rates and unfavorable repayment terms the two most common complaints.

The trade-off is visible in the numbers: speed and accessibility on one side, cost and terms on the other. Neither is automatically the wrong choice. What matters is knowing which trade you are making before you sign.

Why the cost is hard to see

Bank term loans and lines of credit are usually quoted as an annual interest rate, a structure most owners can compare instinctively. Much of the online and alternative market is not quoted that way.

Merchant cash advances and other sales-based financing are typically priced with a factor rate and a holdback percentage. Illustratively: a business takes a $50,000 advance at a 1.35 factor rate and repays $67,500 through a fixed percentage of daily card sales. The $17,500 cost is easy to understand. What is not obvious is that repaying it over roughly nine months rather than a full year — on a balance that shrinks as you pay — produces an annualized cost dramatically higher than the "35%" the factor rate appears to suggest. Add origination fees, and the spread between the quoted number and the true annualized cost widens further.

Nothing about that structure is inherently deceptive. It is a genuinely different product, and for a business with seasonal cash flow it can be the right one. But it cannot be compared to a term loan by eyeballing the headline numbers, which is precisely how the 60% figure happens.

The regulatory response: ten states and counting

Regulators have reached the same conclusion. According to a March 2026 analysis by the law firm Venable LLP, ten states now require some form of commercial financing disclosure: California, Connecticut, Florida, Georgia, Kansas, Missouri, New York, Texas, Utah, and Virginia. New Jersey has legislation pending.

Two 2025–2026 developments stand out.

California SB 362, effective January 1, 2026, tightened the state's existing 2018 disclosure law. It requires providers to express pricing as an annual percentage rate, prohibits using the words "interest" or "rate" in ways that could reasonably mislead a recipient, and requires the APR to be disclosed whenever a provider states a charge, pricing metric, or financing amount to a prospective borrower. The law targets exactly the "simple interest" and non-annualized quoting practices that diverge materially from APR. California's Department of Financial Protection and Innovation has been enforcing actively, entering a consent order in November 2025 against a company that leased equipment to California businesses without providing the required disclosures.

Texas HB 700, effective September 2025, created a disclosure regime specifically for sales-based financing — merchant cash advances. Providers must give written disclosure of the total amount financed, the finance charge, the total repayment amount, all potential fees, and repayment terms. Texas joins Connecticut and Virginia in regulating this product specifically. Providers and brokers must register with the Texas Office of Consumer Credit Commissioner by December 31, 2026, and the OCCC can seek civil penalties of up to $10,000 per violation.

For borrowers in those states, this means a standardized cost sheet you are entitled to receive. For borrowers everywhere else, it means the same information exists — you may simply have to ask for it.

What to ask before you sign

Whether or not your state has a disclosure law, five questions convert almost any offer into a comparable one:

1. What is the total repayment amount, in dollars? Not the rate, not the factor — the number that leaves your bank account over the life of the deal.

2. What is the APR? If a provider will not or cannot state one, that is information.

3. What is the payment amount and frequency? Daily and weekly debits affect working capital very differently than monthly payments.

4. What fees are outside the quoted price? Origination, underwriting, ACH, servicing, and prepayment charges.

5. Is there a prepayment benefit? On a factor-rate product, paying early often does not reduce the total owed. On an amortizing loan, it usually does.

Run those five questions across every offer and the comparison becomes arithmetic rather than instinct.

Where marketplace lending fits

A lender marketplace does not change the underlying economics of any product — it changes how many offers you see at once. Submitting once to a network of lenders rather than sequentially to individual ones produces parallel offers you can lay side by side, which is the condition under which the five questions above do the most work. The Fed data suggests the risk in this market is not being denied; it is accepting the first approval without knowing what the alternatives would have cost.

Small business financing options — including term loans, lines of credit, equipment financing, and merchant cash advances — can be compared across 50+ lenders, with funding from $2,500 to $5,000,000+ and approval decisions often within 24 hours, apply here.

Sources

2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey — Federal Reserve Banks, March 3, 2026 https://www.fedsmallbusiness.org/reports/survey/2026/2026-report-on-employer-firms

State Commercial Financing Disclosure Laws: Recent Developments and Compliance Considerations — Venable LLP, March 2, 2026 https://www.venable.com/insights/publications/2026/03/state-commercial-financing-disclosure-laws

Starting January 1, 2026, For Commercial Financing Offers of $500,000 or Less, New California Senate Bill 362 Places Limitations on the Use of "Rate" and "Interest" — Buchalter https://www.buchalter.com/insights/starting-january-1-2026-for-commercial-financing-offers-of-500000-or-less-new-california-senate-bill-362-places-limitations-on-the-use-of-rate-and-interest-by/

H.15 Selected Interest Rates — Board of Governors of the Federal Reserve System, August 7, 2026 https://www.federalreserve.gov/releases/h15/

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