Andrew Curtis is the CEO of Clearco, a capital partner powering 10,000-plus brands with fast, flexible, non-dilutive funding.
The funding landscape for small and medium-sized businesses (SMBs) has long been a challenging one. Traditional financial institutions (banks) are often hesitant to extend credit to this segment of the economy. They typically require collateral, a long operating history, personal guarantees and high credit scores, criteria many SMBs cannot meet. This leaves a significant gap in the market, forcing businesses to explore a limited set of less-than-ideal options.
Alternative Funding Sources And The Rise Of Nonbank Funders
When traditional financing falls short, SMBs historically resorted to readily available options such as personal credit cards or capital from friends and family. Equity financing, while a viable option for high-growth startups, is typically a time-, resource- and attention-intensive process that distracts founders from their most important job—operating their companies.
More importantly, equity is the most expensive form of capital and requires founders give up a piece of—and in some cases, control of—their company. There’s another more fundamental issue when it comes to equity-funding SMBs, especially when they’re growing rapidly: Too often, founders rely on equity capital to support their businesses’ working capital needs, rather than better-suited strategic and capital projects aimed at long-term growth.
A fast-growing alternative to equity financing—and an antidote to some of its disadvantages—is revenue-based financing (RBF). Such financing offers businesses the opportunity to secure capital in exchange for a share of their future revenues. This model is a popular choice among high-growth e-commerce brands, given how well it aligns repayment with sales performance that can vary with different seasons.
AI Underwriting: Driving Efficiency And Intelligence
The current era in SMB funding is revolutionary, reflecting an evolution transformed and powered by AI underwriting. Nonbank funding partners move today with a speed, precision and understanding of high-growth SMBs that many banks have never possessed and still lack. By analyzing vast, disparate datasets in real time, from a business’s sales figures to its digital marketing efficiency to detailed cohort performance, the best AI underwriters assess risk more completely and accurately in order to offer highly competitive terms. In short, alternative SMB funding partners are functioning as smart capital that can see a business’s true potential that others often miss.
This capability is the engine behind funding models like modern RBF, an increasingly popular option in private credit markets for small, rapidly growing businesses. At my company, we view this model as particularly effective for funding high-growth sectors like direct-to-consumer e-commerce. AI-driven RBF can be a smarter, more adaptive form of capital that allows founders to scale rapidly without the dilution that comes with equity financing or the liens and security required by traditional debt providers.
Beyond Underwriting: Innovations In Revenue-Based Financing
While AI underwriting can be a powerful tool, it’s not a complete solution on its own. The most effective funding platforms are leveraging what they’ve learned via AI to introduce funding innovations that provide even greater value to businesses. This includes early payment options, which give businesses the flexibility to repay their advances ahead of schedule without penalty, lowering their overall cost of capital.
More importantly, some providers have moved beyond traditional fixed installment funding to offer so-called rolling funding. Akin to a revolving credit line, this form of funding provides businesses with continuous access to capital, without the need for reapplying each time a merchant needs capital. Rolling funding thus helps solve high-growth SMBs’ most intractable challenge: predictability and reliability of funding in a volatile, uncertain world.
With these innovations, the best SMB capital partners become valuable strategic partners rather than simply providers of capital at the lowest cost. The data they build via AI-driven underwriting and subsequent funding of countless businesses allows them to tailor financing solutions that meet SMBs wherever they are in their growth cycle. That same experience also drives deep insight into the most common challenges and opportunities their customers face. In addition to providing capital at competitive terms, these SMB funding partners can go one step further, offering critical feedback on business and financial strategy. That advice is invaluable, helping founders and operators avoid pitfalls and accelerate growth.
Conclusion
The evolution of private credit and alternative financing, driven by technological innovation and a more partnership-oriented approach, is ushering in a new era for SMBs. By combining the speed and efficiency of AI underwriting with flexible funding options and valuable strategic insights, SMB funding platforms are providing more complete solutions that never existed before. This transformation can help empower a new generation of entrepreneurs, fueling growth for businesses that are the true engine of the economy.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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