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How Technology Revolutionizes Access To Capital For Small Businesses

By John Lie-Nielsen, an entrepreneur and investor specializing in financial services, and the CEO of One Park Financial.

Imagine a world where small businesses flourish based on their own merits, not just the owner’s credit score. A world where they are not denied capital due to inaccurate assessment or short-sighted assessment by funders. Thanks to technology, we’re living in that reality today.

Small businesses often lack the robust financial records that large corporations have, making it difficult for funders to accurately assess their potential. Moreover, large banks and financiers are just not willing to take the risk causing growth to stall, especially for SMEs.

However, timely financial support can be a game-changer. Technology is unlocking a wealth of data, enabling funders to make more comprehensive and accurate assessments, and thus, extend growth capital to promising small businesses.

Traditional Versus Technology-Driven

Evaluation Of Data Recency

In days gone by, funders often judged a business’s health using outdated metrics, like tax returns from two or three years prior. This method frequently missed the real-time ebbs and flows of a business. Today’s tech-driven approach has changed the game, relying on fresh data, sometimes from just a day ago, to offer a far more accurate and timely picture of a company’s financial standing.

Nonfinancial Metrics For Assessment

In the past, the assessment of businesses for financing was quite linear, focused mainly on plain financial figures. With technology driving the change, the approach is much more inclusive. Funders are incorporating nontraditional data points such as the social footprint or the company’s environmental, social and governance (ESG) performance.

Business Growth Trajectories

I find that traditional methods struggle to grasp the evolving nature of small businesses, often limiting them to survival capital. Modern technology, however, can detect key trends, such as tracking the momentum of customer reviews for a nail salon. By pairing qualitative insights with quantitative data, funders gain a deeper understanding, aiding better decisions on growth capital allocation.

Benefits For Borrowers: Empowering Small Business Owners

Small business owners can better prepare for loans by leveraging AI-driven dashboards to gain a comprehensive view of their financial health and streamline business operations to boost creditworthiness. Here are some additional benefits that AI can bring for them:

Quicker Outcomes

AI accelerates funding decisions by instantly analyzing vast amounts of data, from credit history to current market conditions, providing rapid and accurate assessments leading to faster yeses and noes. The faster small businesses get answers about funding options, the faster they can make informed decisions for their future.

Equitable Access To Capital

AI-enabled funding models can be designed to be agnostic to factors like race, gender and location, focusing only on merit-based criteria such as business performance and creditworthiness. This levels the playing field, especially for traditionally underserved communities and rural areas that might have been limited to the biases of local community banks.

Alternative Funding Options

AI tools can assist in streamlining the underwriting process for funding methods like revenue-based financing (RBF). Though AI swiftly evaluates business profiles using historical data, trends and industry specifics, final decision-making relies on the extensive experience of human experts for risk assessments.

On the other hand, blockchain systems help borrowers by removing intermediaries and driving automation through smart contracts, which expedites the funding process. Blockchain enables decentralized peer-to-peer funding platforms, which are, by definition, agile and fast.

Benefits For Funders: Innovating Business Funding Practices​​

Safer Investment Decisions

AI technology excels in adapting to market shifts quickly and efficiently. For instance, when the transportation sector faced unprecedented challenges like inflation and supply chain disruptions last year, traditional three-year credit models fell short. AI filled this void, deploying real-time credit simulations for immediate and more rational adjustments to funding criteria.

Interestingly, by utilizing AI-driven credit risk assessment, lenders can experience a 25% decrease in exposure to high-risk customers and a 35% reduction in the rate of non-performing loans. But these were more informed and prudent decisions aimed at minimizing potential losses. In this way, AI demonstrates its power to make timely, data-driven funding decisions in fluctuating market conditions.

Less Workload On Human Analysts

In traditional processes, human analysts must handle both straightforward and complex loan cases, spreading their attention thin. AI efficiently tackles straightforward cases, freeing our team to focus on the “big middle,” where complex data requires more nuanced human judgment for loan approval decisions.

Safeguard Against Fraud And Theft

Blockchain, for example, can ensure data integrity. Blockchain systems help funders by guaranteeing the verified identities of borrowers and by having more reliable data to analyze for creditworthiness.

A Marathon Not A Sprint

It’s important to note that integrating new technology with existing systems can lead to disruptions in business operations and may cause compatibility issues. Here are a few actions leaders can take to prevent this:

• Conduct thorough research.

• Seek expert advice.

• Run pilot tests.

These strategies can go a long way in avoiding disruptions. Additionally, with the adoption of digital technologies, the protection of sensitive information becomes a significant concern. Leaders should consider investing in professional cybersecurity services for enhanced protection.

Navigating small business growth is like marathon training: Preparation is essential. Technology, such as rentable AI CFOs, aids in long-term planning, offering limitless opportunities for prescriptive recommendations. However, like the disruptive internet era, AI comes with its share of risks, including security concerns that require collective action. In this rapidly evolving landscape, staying educated will differentiate the winners from the losers.

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