99% of all the US businesses are small businesses. These 33 million plus businesses employ more than 61 million Americans. They are hotbeds of innovation and growth engines of the economy. US SBA data shows that almost two-thirds of net new jobs over the last 25 years have been created by small businesses, approximately 13 million jobs. Even during the pandemic, small businesses contributed to 70% of all new job creations.

Since 2021 there has been a significant increase in the creation of new businesses, especially with minority and women owned businesses. However, 20% of businesses close within a year and only a third are operational 10 years from the date of inception. The business failure rate has been going up over the last few years, as per the Bureau of Labor Statistics. A significant factor in the failure of new businesses is access to financing. Almost 40% fail due to working capital crunch and their inability to secure financing. Furthermore, small businesses need to manage scarce resources effectively by dynamically adjusting for demand and supply based on the economic environment in order to ensure overall financial health and long-term viability.

Despite many regulations such as Dodd Frank Act and CRA guidelines, access to financing for small businesses continues to be a significant challenge and directly impacts their survival and growth potential. Lenders are worried about high delinquency rates on small business loans, whereas business owners often cite a challenging and stressful lending experience where they are forced to turn to multiple lenders, given long turnaround times and high decline rates.

What's driving the lack of access to working capital?

Information asymmetry and lack of expertise to harness sources of external, market and contextual data for small businesses in a regulatory compliant way is a big stumbling block. This results in lenders continuing to rely on archaic credit models using narrow data and rules based decisioning. Lending hasn't kept pace with innovations and therefore suffers from a perceived higher than actual risk assessment rating. This further limits the availability of capital to small businesses due to a lender's loan loss and provisioning requirements.

Given the importance of small businesses in generating jobs, the dependence of families and communities on them is undeniable. To bring real change to this lock jam, there are several areas that need to be addressed:

• Manage lending approvals while keeping a check on defaults
• Scalable and automated loan level monitoring to meet regulatory compliance
• Operational efficiency in risk management, while enhancing the small and medium business (SMB) lending experience and turnaround time

Driving lender ROA with scalable and operationally efficient risk management

From regular economic cycles or through economic upheavals, natural disasters, and other crises, lenders end up taking a blanketed approach of credit tightening towards all SMBs. This shows that banks desperately need tools that will allow them to assess the economic potential of small businesses that considers the immense variance among business types, loan amounts and regulatory guidelines. Advancements in AI technology can play an important role. However, it's important to ensure that the AI is inclusive, unbiased, transparent and is designed to meet the objectives of both lenders and the businesses alike.

It is important that any such risk assessment tool be able to leverage varied sources of reliable data (financial, non-financial, traditional and alternate/expanded) to help lenders balance risk and profitability while enabling access to much needed finance. Moreover, compliance and monitoring should be natively built-in rather than an ill-fitting afterthought so that it is not a burden but a differentiator. Finally, implementation needs to be operationally scalable for the lender and friendly for the business. All this together can really help facilitate the flow of money to small business, often considered the heart of America but still traditionally under-served. The survival of these small businesses is essential for enabling financial inclusion in our communities and for the growth of the US economy.