The rise of Artificial Intelligence has completely shifted all forms of business practices. Specifically, A.I. is transforming small business lending in ways both positive and negative. On the positive side, it helps detect fraud, increases the speed of underwriting, and levels the playing field somewhat. On the negative side, A.I. loan monitoring can be both a blessing and a curse. So, it is wise to be aware of what these changes mean to your small business.
As we've said in multiple posts, small to medium size businesses employ nearly Â½ of the nation's workforce, but the sector is often overlooked. Whether it's healthcare, retirement, or taxes, small businesses rarely have the advantages that big businesses do.
Funding is no exception. Small to medium-sized businesses often struggle with traditional lenders. Traditional lenders make the most money on big loans. Microloans and SBA loans are not their main focus. While SBA loans are hands-down the best option for small to medium-sized businesses, the application process is slow and cumbersome. We've discussed these challenges before, but digital lending may help alleviate some of these challenges.
When it comes to small business lending, underwriters are always concerned about fraud. A.I. has vastly improved the fraud detection process with algorithms based on credit-bureau data, ID verification systems, and numerous other data sources. These algorithms provide a predictive probability of fraud, which can immediately flag risky applications. Thereby, it speeds the process along.
The traditional lending process is laden with bias. Both gender and racial biases are well-documented. A.I. has the potential to lessen these biases, but its track record so far is a bit mixed.
That said, the A.I. models do use a significantly larger data set to help paint a more detailed picture of creditworthiness. This does helps avoid the Paydex paradox. In other words, you need a load to gain sufficient credit history, but how can you do that if you've never had one. It's the insufficient credit history trap. While A.I. doesn't eliminate all bias, it does help to level the playing field somewhat.
The best time to ask for capital is when you don't need it, but few small businesses have that luxury. Historically, the review process for larger loans can take weeks at best, months at worst. Not to mention, the time it takes to collect and provide all the necessary documents and follow-up questions. Even if you didn't need the capital at first, you could be in more dire straits by the time the process ends.
The best time to ask for capital is when you don't need it, but few small businesses have that luxury. Historically, the review process for larger loans can take weeks at best, months at worst. Not to mention, the time it takes to collect and provide all the necessary documents and follow-up questions. Even if you didn't need the capital at first, you could be in more dire straits by the time the process ends. A.I. solves this issue with its predictive models. These models dramatically streamline the underwriting process. The model can quickly provide eligibility parameters in hours vs. weeks. Thereby, it makes the process simpler for everyone.
This helps the banks, but not necessarily the small business borrower. However, this is the price we pay for the benefits above. Since lenders now have access to all this data, tracking your business is much easier. Those same A.I. models that were trained to improve fraud detection, level the playing somewhat, and speed things along, also were trained to predict default.
This is where a dose of caution is worthwhile. While improved loan monitoring does make small business lending less risky and more profitable for the bank, it does make it a bit more risky for the borrower. Lenders are a conservative lot. Therefore, given any mixed data, they are likely to interpret it more negatively. So, while you may think the business is fine, the A.I. model may not. It could be much harder in the future to secure a small business loan.
On the whole, the changes to small business lending due to A.I. are mostly positive, but with any new tool, it helps to understand how it can be used for you and against you.
Brian Cairns, CEO of Prostrategix Consulting. Over 25 years of business experience as a corporate executive, entrepreneur, and small business owner. For more information, please visit my LinkedIn profile
ProStrategix Advisors Copyright 2020 © All rights Reserved.