Daniel Katz, VP business operations at Lending Express, on how AI tech could unlock funding for thousands of SMEs
SME lending is booming in Australia, indicating huge potential for alternative online lenders. Figures from OnDeck show that online SME lending is reporting higher growth rates than those seen in the US at a comparable stage. Research shows that, by 2020, annual originations could exceed $2bn.
However, there remain massive opportunities that Australian lenders and brokers alike are not taking advantage of.
In the SME space there is no one-size-fits-all approach. Even though more than 80% of businesses apply for loans ranging from $5,000 to $100,000, there are those that apply for amounts at the extreme ends of the spectrum. For example, more-established SMEs often desire loans of at least $200,000. At the opposite end of the scale are those SMEs looking for small loans of less than $6,000.
Although solutions do exist for some companies needing large loans, there are few broadly accessible, attractive solutions for low-risk businesses requiring large sums. Such low-risk companies deserve attractive rates from online lenders. They do have the option of a bank loan, but a long, drawn-out application process – not to mention the current lending environment – often deters them from committing.
The current lending market in Australia caters mostly for the midstream loan amounts, all but ignoring those seeking loans at the end of the spectrum.
The US lending market offers solutions for both large and small loan applications, and Australia could also benefit from tapping this potential.
For instance, the US offers large loans to low-risk SMEs at very attractive rates in the form of government-backed SBA (Small Business Administration) loans, but unfortunately such a thing does not yet exist in Australia.
Further, in the US, SMEs can apply for a line of credit through lenders such as Fundbox and Kabbage, which both offer flexible access to small amounts of capital – as little as $2,000. This small-credit option does not currently exist in Australia, so alternative lenders could benefit from offering similar products to SMEs.
In the US, 58% of viable SMEs don’t have access to funding. Many of these SMEs are disqualified for something as simple as a minor mistake on their application and usually aren’t given an explanation for their rejection.
The US lending market offers solutions for both large and small loan applications, and Australia could also benefit from tapping this potential
Even though the alternative lending market is growing in Australia, more than 60% of SMEs still don’t have access to funding. This is usually due to the fact that banks and other lenders typically utilise old-fashioned binary parameters to assess potential borrowers. The tools to change this already exist.
The use of AI technology in the lending market can unlock funding opportunities for thousands of Australian SMEs who have previously been turned away by banks or other lenders. By profiling each SME in depth and on an individual, customised basis, alternative lenders are able to judge the SME based on its overall health and not just on credit-score factors.
Furthermore, by automatically reviewing each application, this technology avoids simple errors and gives viable applicants the opportunity to be approved.
AI for brokers
Brokers should also be turning to AI solutions to better profile and evaluate potential borrowers, which will help increase approval rates and reach a much wider target market. AI can help brokers stay competitive while better serving their customers.
Alternative lenders have managed to grab a large share of the retail bank market simply by using algorithms and AI to make small business loans faster, easier and more convenient, and also by optimising their customer service experience through the use of chatbots.
Major financial institutions and brokerages are already implementing AI in the SME lending space. It is estimated that 61% of financial services firms will be using AI by the end of 2018 and the global algorithmic trading market is expected to grow to US$18.16bn by 2025 from US$8.79bn in 2016, indicating that more financial institutions are literally buying into the idea of brokers using AI. In 2017, Morgan Stanley announced it would provide 16,000 of its financial advisers with machine learning algorithms that would identify and make recommendations about potential brokerage opportunities.
It is not enough, however, just to implement the technology – brokers need to learn how to use AI and algorithmic solutions. Brokers should start implementing AI solutions now to make smarter approval decisions and offer better customer service. AI is already being adopted by major brokerage firms to identify, sort and manage clients, and is set to grow exponentially in the coming years.As firms increasingly adopt AI, this will also be good news for the 58% of business loan seekers who have been denied financing for being traditionally unviable brokerage clients, and will open up a new market share for lenders.
VP of business operations