AI Is Transforming Small Business Finance, Closing Global Funding Gap

Use of AI in small business finance is unlocking capital for SME growth.

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Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. In fact, SMEs contribute up to 40% of GDP in emerging economies, according to the World Bank. However, access to finance is a key constraint to SME growth.

The unmet financing needs of small and medium-sized enterprises (SMEs) in emerging markets is estimated to be $5 trillion, according to the World Bank and the International Finance Corporation (IFC). This gap limits the ability of these businesses to grow, create jobs, and build resilience in their economies.

Fortunately, AI is playing a transformative role in small businesses finance because of the technology’s ability to quickly and efficiently assess a borrower’s credit history and current financial situation, thereby speeding up the approval process, while minimizing lender risk. Further, AI helps match SMEs with financing products including term loans, SBA loans, business lines of credit and revenue-based financing that best fit their situation.

Related: AI In Lending – The Hidden Tech Refining Your Bank Experience

Recent developments in data and analytics will greatly improve SMB underwriting by enhancing efficiency and reducing labor-intensive processes. BCG estimates that implementing advanced analytical credit decisioning and monitoring systems can reduce the total cost of the end-to-end credit process by 30% to 40%.

For more than a century, entrepreneurs were at the mercy of a banking system that focused primarily on credit scores and collateral. Firms with short credit histories were typically rejected without consideration of sales and cash flow, which AI can analyze in real time to better assess a business borrower’s creditworthiness. This has been particularly helpful in expanding access to capital for women-owned and minority-owned businesses that have little to no credit histories and limited experience with the banking system.

Advantages of AI-Driven Small Business Loan Underwriting

Today, AI-driven underwriting automates and speeds up the application and verification process while reducing labor costs. Businesses are often able to secure funding in a day or less, whereas traditional bank loan approvals could take weeks or even months. In many cases, speed is critical for survival if a business faces urgent cash flow needs.

For example, if a company needs money to quickly repair or replace equipment that is critical to operations or if the business is in danger of not making payroll due a cash crunch, speed is of the essence. Fintechs have effectively played this role in the past few years while grabbing market share from traditional banks in the small business lending space.

AI also provides ongoing monitoring of business finances and can provide cash flow analysis that can help businesses forecast revenue, manage costs, and increase earnings.

The result of all this is the disruption of traditional banking models that are giving way to AI-powered, transaction-based, digital-first financial ecosystems, including e-payments, micro-lending, digital currencies. Beyond U.S. shores, AI can help emerging markets in Africa, the Middle East and elsewhere leapfrog to sophisticated financial products without ever having to build legacy banking structures.

Recently, I conducted a fireside chat with Jeffrey Sachs, a prominent economist, public policy analyst, and professor at Columbia University, where he is director of the Center for Sustainable Development and president of the UN Sustainable Development Solutions Network.

Sachs advises the UN on global economic issues, including the trend of convergence, “leapfrogging,” and the advantage for emerging economies, such as India, China, and UAE, which are embracing open-source AI, which widens access and speeds innovation. He also strongly advocates for math and science education and AI labs in these emerging markets and here in the U.S., as well.

“Every country is now trying to do is to increase the share of SMEs because they realize it’s the engine of economic growth,” said Sachs, who was named one of the “100 Most Influential People in the World” by Time magazine in 2004 and 2005.

AI and Convergence

“Emerging markets are where most of the world population is. It’s where most of the innovation should happen, but they don’t have the capital to do it. The most important economic trend today is convergence: poor countries growing faster than richer countries,” he adds.

For instance, India is growing routinely at 6 or 7% per year right now. China averaged about 10% per year for more than four decades. Sachs believes that Africa is going to have a tremendous, tremendous of growth over the next 30 years. One factor that will fuel the tremendous growth of these countries is the use of AI.

“AI is a decisive tool for progress because it is a general purpose technology that permeates every single sector of the economy,” he said.

There is no doubt that in job losses in the short term. For instance, in Africa, a significant part of the population works in agriculture. In 20 years, there won’t be so many jobs in agriculture, not only because of AI, but also robotics and mechanization. Some jobs will no longer exist.

“It’s either going to be mass unemployment and unskilled people in the cities, which would be devastating, or it will be mass education,” he warns. “How do you get mass education? AI will play an important role. Digital will be huge for education because there aren’t a lot of qualified teachers in rural areas. So, I’m telling even the poorest countries to get everyone online, to give every kid a device.”

AI and Open Source

Open source is set to spread across the emerging economies. According to the award-winning economist, the “rich world” comprises about 15% of the world population, while developing countries comprise 85%.

“That’s where the big growth is going to come. (Countries in the developing world) will be incredibly important,” Sachs said. “Rapid movers, whether it’s the Emirates, China or India, will go open source to bring a larger network base. Societies better get their act together to spread the benefits of this technology. Otherwise, they will fall to pieces.”

For small business financing in U.S. and emerging markets, financial inclusion has long been a tough challenge because just the cost of giving credit – especially outside the U.S. – is high. That’s why Google, Biz2Credit, and some of the world’s top universities have established a partnership to try to figure out how AI can make it easier to establish securitization that’s not available in other markets, even in wealthy companies, such as UAE.

Related: Digitization Of Small Business Lending Helps Fill The Lending Gap

More financial inclusion and better financial products will lead to more depth in the capital markets, which have been lacking in emerging economies.

“I think that there is a kind of convergence and leapfrogging. We (the U.S.) have built a banking sector-led financial system since the 19th century. I don’t think that will be the same going forward. You don’t need banks for payments anymore. You don’t need them for reliability. So the whole link of money and lending is going to become separate,” he said.

The structures of finance are going to change tremendously. The world is going to have electronic-based transactions. Some countries won’t go through the stages of building up a big banking sector; they’ll go directly to E-payments and to AI-powered micro-lending. You can pay electronically, digitally, anywhere in the world. Who could have guessed this even five or ten years ago?

The U.S. has benefited from being a first mover in AI and having a handful of tech giants that have given the country a huge advantage. Now is not the time to rest on our laurels, however. In fact, countries like UAE and Saudi Arabia have already invested many millions into AI development at the government level. They’ve set up universities to train people. The AI labs in Dubai are spectacular

Sachs says that poor countries have to get into the game, too. He advises them to mobilize capital, friends, partnerships, and business connections to move now, because it will only get harder for economies that fall behind.

“African leaders say, ‘We’ve got the great young populace.’ I explain that it is a headache if they don’t have education,” Sachs said. “They don’t have skills and they’re not online. So you better work hard to make sure they do.”

AI and The Bottom Line

Small businesses are the growth engine of economies worldwide, but they remain systematically underfunded. The global economy is changing with a greater focus on small business. The challenge in the U.S. and elsewhere is securing credit – especially so in emerging markets. AI can help solve it.

Cutting-edge research and advanced technologies promote economic inclusion and economic growth. Improved access to finance for small businesses fosters innovation, job creation, and long-term resilience in Open source is set to spread across the emerging economies. Sachs estimates that the “rich world” comprises about 15% of the world population, while developing countries comprise 85%.

“That’s where the big growth is going to come. (Countries in the developing world) will be incredibly important,” Sachs said. “Rapid movers, whether it’s the Emirates, China or India, will go open source to bring a larger network base. Societies better get their act together to spread the benefits of this technology — both high-income and emerging economies.”

Small and medium-sized enterprises globally are facing a credit crunch. AI has the potential to solve this by analyzing data, predicting risk, and streamlining lending like never before. Sachs provides a roadmap for how this transformation could unfold over the next 10–15 years. Smarter, AI-driven credit systems could finally give many SMEs the financing they’ve been missing. For entrepreneurs, investors, and policymakers, this is a space worth watching closely.

Lenders who adopt AI-driven technology could see loan approval times cut in half and a 30% increase in lending volumes. At scale, AI technology could close the SME financing gap to unlock up to $750 billion in private credit for U.S. small businesses, and boost GDP by as much as $1.3 trillion annually. We can expect AI to continuously unlock capital for SMEs both in the U.S. and across the globe.