Signals in Small Business Lending: An Interview with ForwardAI CEO Nick Chandi

Originally shared on Finovate

 

Last year, while the pandemic was heating up, banks’ attitudes toward small business lending turned cold. With lockdown measures in place, underwriting became difficult and risk increased across commercial lending.

We tapped ForwardAI CEO and Co-Founder Nick Chandi to discuss what the current lending environment looks like, how data can help, and what we can expect to see in 2022.

A serial entrepreneur, Chandi co-founded ForwardAI, a fintech that helps banks, lenders, and businesses access and analyze small business data. The company launched earlier this year to help fill the gap in small business-focused technology available to companies that serve small businesses.

What are some unseen advantages in leveraging financial data when underwriting small business loans?

Nick Chandi: The trend I’ve seen has been a shift to leveraging direct financial data, as in connecting to banking, accounting, payments, and commerce software using APIs instead of having potential borrowers export to spreadsheet or PDF. In the past, all lenders did the latter option and that caused a huge hiccup. After all, whereas with accounting data you can see insights like client base diversification, profits and loss statements, and more, that data can be manipulated to look better than reality. With banking data, it’s the opposite; data is often context-less but it’s practically impossible to fake.

Previously, when lenders looked at financial accounting data, they would have to manually cross reference transactions. This was a tedious task often taking weeks, but one that with API technology these days can be done in seconds using machine learning and AI. This can lead to exceptional savings for banks and lenders in their loan underwriting time.

In 2021, what kind of appetite have you seen from banks when it comes to small business lending? Has the pandemic caused more hesitancy than in years past?

Chandi: For a while in 2020, many lenders completely stopped lending to small businesses. In 2021, we saw much of the industry has returned to or pretty close to business as usual.

Have you noticed a specific type of lender take on more small business loans?

Chandi: We have seen that revenue-based financing has become very popular in the last year. This can be seen from the valuation of Pipe ($2 billion in May 2021) as it provides an opportunity for entrepreneurs to transform their future revenue into an asset with instant access to annual cash flows.

Previously, it cost lenders about the same amount to review a business for a $50k application as it did for a $250k application. As lenders begin to incorporate automation and process loan applications faster, that cost goes down and becomes more profitable. I have noticed lenders are incorporating more small business loans into their offerings, even if it wasn’t a market they put significant effort into previously.

What trends do you expect to see in small business lending going forward into 2022?

Chandi: The biggest trend change is going to be that direct data access I mentioned earlier. Simply put, with modern lenders using direct access to permissioned data instead of spreadsheets and PDFs, we can expect lenders to process significantly more financing applications and faster than ever before. Traditionally, SMBs have been a market that most companies haven’t focused on, but after the pandemic I think a lot of the public sentiment has shifted towards desiring and expecting more support for struggling small businesses in their community.

Going into 2022, I expect to see financial institutions and fintechs across the world upgrade their services and begin offering better products; enhanced financial management portals, expedited lending options, personalized financing offers based on predictive data, and proactive cash flow alerts may soon one day be normal. That’s part of the reason we created ForwardAI.

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