By James Chittenden
Fortunately, AI is still our servant and not our master, at least for the time being.
For a long time, AI was of poor quality and unreliable. Then it rapidly became quite good, and available to everyone with a Wi-Fi connection and mobile device. Its proliferation offers opportunities and hazards.
One fantastic development is the ease and convenience of obtaining
personal and small business financing.
The days of taking meetings with bank officers and driving all over town to apply in person with different banks for loans are over. You don’t have to do that anymore.
It is now possible to request and to receive a variety of loan offers on your phone. If you haven’t tried it, it works like this. You visit the platform and answer a few simple questions. The questions are like those asked by a loan officer.
You start with the basics such as your name, address, phone number, email address. You are then asked your approximate credit score, income, and, if applying for business credit, your time in business and annual revenue.
The road most traveled, and why you should avoid it.
Novice business owners often apply at the large, big-box banks. They are, after all, the largest and most visible. However, they are also the most bureaucratic and strict. Your loan request must fit a narrowly specified set of criteria. If any part of the application is outside of those criteria, exceptions are subject to approval of a conga line of risk-averse managers.
For businesses, that criteria will include strong credit, revenue of at least six figures, and two or more years in business. That rules out startups and most small businesses.
In other words, don’t waste your time with the large banks if you are a startup or small business needing a loan. If large banks are unwilling to accommodate startups and small businesses needing loans, who can?
The road less traveled, and why it is worth checking out.
An AI-powered lending platform reduces hassle and increases your chances of approval. It does so by matching your data from your application to the lending criteria of a wide range of lenders. But who are these lenders?
They are typically small lenders or credit unions you have never heard of. They are fighting to grow their balance sheets and to expand.
You see, a loan generates income for the bank and is therefore an asset on the balance sheet of your bank. The more assets a business has, the more equity it has. It becomes worth more, which of course benefits the founders and officers handsomely.
In contrast, deposits are liabilities to the bank. Why? Because when you as a customer want your money that is on deposit, the bank must make your money available.
Banks want as many high-performing loans as possible. They lend money to Paul, he pays it back with interest, then the bank lends that same money to Peter, who pays it back, cycling the money again and again while growing it. A growing lender is willing to take a little more credit risk than major banks are. It is also why they take advantage of U.S. Small Business Administration (SBA) backed loans. If the borrower defaults, the SBA acts as an insurer, paying the lender back.
How to find eager small business lenders.
These smaller, more aggressive lenders use loan brokers to do a lot of their marketing for them. And those loan brokers are using AI.
How? The fintech varies, but the concept can best be described as like a travel website that gives you options for flights, rental cars, and hotels once you enter your destination and travel dates. If you book your travel on the site, it earns commissions from airlines, rental car companies, and hotels, largely replacing travel agents of generations past. Those travel sites have run on internal search engines for years, but AI has considerably refined the results you get from them.
Lenders of all sizes and even investors such as venture capitalists are using similar sites to do their marketing for them. If you apply, you will still be asked for documents such as financial statements, bank statements, and tax returns. However, you can have them uploaded in one secure place, easily provided to a multitude of lenders of your choosing. That significantly reduces legwork and billable hours from your accountant.
Your financial data will be used to underwrite loans, and underwriting is to test your financial results against similar businesses and the lender’s guidelines. How are your profit margins? How quickly do you collect on your receivables? Does your inventory sell faster than your competitors, slower than your competitors, or roughly the same?
That number-crunching is directly from the financial results shown on your financial statements and tax returns. In time, AI may perform these tasks at significantly less expense than human underwriters. However, this is an area that AI is still a servant rather than a master, as machine learning still relies heavily on human input.
Advantages and Disadvantages
The advantages to AI-powered money brokers or loan brokers are numerous. It increases visibility for lenders of all sizes, which forces banks to compete for loan customers. And that is good for all of us.
Faster and more competitive loan approvals will also grow economies faster. If inflation and interest rates are relatively stable and well-managed, this helps to keep more of us employed or in business.
The disadvantages will be evident if or when AI goes from being our servant to being our master. The temptation for top management at banks to “leverage” AI for as many functions as possible will be great, as it saves considerably on payroll. There will be a race to the bottom as lenders seek to automate your banking and loans, while delaying cost reductions to you as long as possible.
If you received poor value because of AI, hold us accountable!
If that happens to you, spread the word. Use any number of review sites to warn others about a lender’s bad automation that causes hardship and inconvenience. If enough people learn from that misfortune, you may see the free-market impose discipline on this lender until they make operational improvements.
Additionally, AI lacks human discretion. AI won’t care about the medical or job hardship that caused your 30-day mortgage late payment, and there may be no human manager to override the automated denial, or calling of your loans, or any other adverse actions that a lender may take against you and other borrowers. AI is still our servant and not our master. We should not allow it to be any other way.
Automated money brokers and loan brokers are not completely automated. But the right combination of human discretion and AI efficiency benefit us all.
For now, AI is the servant of banks and their customers. It’s up to all of us to keep it from becoming the master.