If you’re a small business owner, chances are you have tried and failed to get a loan from a bank in the last decade.
The New York Times reported that fewer than one in five small business loans are approved by banks.
The simple fact is that banks aren’t lending to small businesses anymore. It’s just not profitable for them. As banks have moved out of the SMB (small and midsize business) loan space, however, several enterprising companies have sprung up to take their place. The refusal of banks to lend to small businesses has fuelled the merchant cash advance revolution.
There are now more than 50 providers of these kinds of loans and the market has been valued at $500 million to $700 million.
Part of the allure of these merchant cash advances is the promise of fast cash, regardless of your credit score. Unlike traditional banks, applications can be approved in a matter of minutes and loans provided within a day or two. As most merchant cash advance providers operate almost entirely online, the speed is all made possible through technology and machine learning -- Artificial Intelligence, or AI.
How AI is changing the way you fund your business
When a bank reviews a loan application, it assesses a series of well-known data points: years in operation, monthly gross revenue, operating costs, assets, liabilities, profitability, etc. These data points have been a reliable tool for banks for over a century, and have allowed them to provide millions of risk-managed loans.
However, these data points are no longer sufficient to calculate a loan’s risk, especially when it comes to small or mid-size businesses that do not have years of a track record.
For anyone who has been refused a loan from the bank and then been granted one by an alternative lender, it will come as no surprise that the alternative lenders generally do not even consider the traditional indicators of risk that were found in the old data points.
Although alternative lenders still use some of these data points, they have adopted the use of “softer” data points that they gather with the help of big data. They have also taken steps to build machine learning models and algorithms that can analyze millions of pieces of data in an instant and come to an objective decision about the riskiness of a potential borrower.
When an alternative lender considers your loan application, their machine learning-based algorithms pull millions of different data points about you and your business from thousands of different locations. This can be things like your industry’s reputation, the amount and quality of online reviews your business possesses, your business’s social media accounts, and much, much more.
The result is an entirely new, data-driven view of whether you and your business are suitable for the loan and the repayment terms that you have applied for. The vast amount of data points used to generate the decision can mean alternative lenders can offer loans confidently to businesses that banks wouldn’t touch. And because the algorithms utilized by these alternative lenders are based on AI, the more data provided to the algorithm—the number of successful loan repayments, for instance—the more accurate they become at evaluating a potential borrower’s risk.
A machine learning platform also removes any of the biases that a business owner might otherwise face when applying for a loan. A person’s sex. age, religion, and race are inconsequential to a machine that is only interested in determining whether a business can afford the loan and on what terms. So, in addition to increasing financing to businesses that turned away by banks, the increasing use of AI should mean that more female business owners and owners from minority backgrounds will be getting funding, as well.
A word of warning about alternative lenders
While alternative lenders are providing an accessible and much-needed service to small business owners, care should still be taken when acquiring a loan.
Although the financing provided by alternative lenders is convenient, it does come with some strings attached. Interest rates are often significantly higher than the rates you might get from a traditional bank—some can be as high as 100% per year or more! Repayment terms are also incredibly strict. Daily payments are common, and the steady march of a fixed daily payment can put significant pressure on a business’s cash flow.
The last thing you want is to have to take out another loan in order to meet the daily payments of your initial loan.
What can businesses do instead?
AI may be transforming the finance industry, but some traditional tactics still have their place. If businesses need cash for growth and investment, they might not need a loan at all.
Instead, they could find the cash they need by settling their debts to a lower amount, or consolidating their debts so they have a single, manageable payment.
If you’re juggling several business debts, you could consolidate them all into a much smaller monthly payment that offers better repayment terms and interest rates. In doing so, you could free up the cash that you were previously spending paying off the debt and invest it back into your business.
Alternatively, you could significantly reduce the amount you owe and pay off your debt in one payment by pursuing a settlement strategy.
For more information on pursuing a debt settlement or consolidation strategy, arrange a free consultation by calling one of our debt experts on 877-312-6478 today.