The Evolution Of Small Business Lending And AI-Driven Underwriting

Joseph Lustberg, cofounder and CEO of Upwise Capital, a leading small business financing marketplace.

The small-business lending landscape is dramatically shifting in 2025, with artificial intelligence reshaping how entrepreneurs access capital.

Traditional credit scores are giving way to dynamic lending profiles that incorporate real-time business performance data, social sentiment and industry-specific metrics to determine creditworthiness. Traditional credit score lending models are giving way to dynamic lending models that incorporate real-time business performance data, payment history and industry-specific metrics to determine creditworthiness. Alternative lenders are leveraging AI-driven platforms to offer hyper-personalized loan products, with terms and rates that automatically adjust based on a business’s cash flow patterns and market conditions.

As a fintech company working daily with small to medium-sized businesses, I’ve observed a fascinating trend: While many companies retreat from borrowing in today’s high-rate environment, many successful operators are strategically leveraging debt to gain competitive advantages.

Transforming Debt Into Profit

Let me share a recent example. A New Jersey-based manufacturing company approached Upwise Capital seeking $2 million in equipment financing. At first glance, the 10.5% interest rate gave them pause—it was significantly higher than rates they’d seen in previous years. However, after analyzing their operations, we identified how this investment could transform their business despite the higher borrowing costs.

The funding enabled them to purchase an automated production line that reduced their labor costs by 35%. The annual savings on payroll and related expenses exceeded $400,000, while their debt service on the equipment loan was approximately $280,000 annually. This meant that even with “expensive” money, they were cash flow positive by $120,000 yearly—not counting the additional capacity and quality improvements the new equipment provided.

This scenario illustrates a crucial point about today’s lending landscape: While rates are higher than what we’ve seen in the past decade, the focus shouldn’t be solely on the cost of capital. Instead, business owners need to evaluate the return on invested capital (ROIC). When a project or expansion can generate returns exceeding the borrowing costs, it remains a sound business decision regardless of the rate environment.

How Smart Businesses Are Leveraging Capital In 2025

We’re seeing forward-thinking businesses use this period to:

• Automate operations to combat rising labor costs
• Acquire struggling competitors to expand into new markets while others contract
• Invest in efficiency improvements that reduce operating expenses
• Purchase real estate while properties are priced lower due to rate pressure

The reality is that higher rates have created opportunities for well-positioned businesses to gain market share. While their competitors remain paralyzed by sticker shock, savvy operators are finding ways to grow and improve their competitive position.

The Importance Of Finding The Right Lender

The key is working with lenders who understand your industry and can help structure financing that aligns with your business’s cash flow and growth objectives. In today’s market, it’s not just about securing capital—it’s about securing the right type of capital with terms that support your strategic goals.

For example, through small-business lending marketplaces using lender match technology, businesses can be evaluated based on dynamic lending profiles that incorporate real-time performance data, not just traditional credit scores.

This evolution is particularly evident in how Upwise Capital has pioneered “micro-moment lending”—where funding decisions are made within hours through sophisticated algorithms analyzing multiple data points with human underwriting oversight before final approval.

For instance, when a Miami-based restauranteur needed quick capital for a kitchen equipment upgrade, the platform’s AI analyzed his point-of-sale data, online reviews and seasonal patterns in the bank statements to provide approval within a few hours.

Unlike previous attempts with traditional banks, which took three weeks and resulted in rejection due to his seasonal revenue patterns, Upwise’s algorithm recognized the legitimate cyclical nature of his business and approved him for $150,000 on a line of credit within hours. The restauranteur used those funds for the kitchen equipment and upgrades that needed to be done.

Mitigating Risks In AI-Driven Underwriting

Understanding AI-driven lending risks is key when evaluating online financing options. While AI-driven lending offers unprecedented access to capital, business owners should consider several key risk factors:

Data Accuracy and Quality

• Verify that all submitted financial data is accurate and current.
• Maintain clean, well-organized financial records.
• Regularly audit automated data feeds to catch discrepancies.

Algorithmic Bias Awareness

• Request transparency about the AI models used in the evaluation.
• Understand how industry-specific factors are weighted.
• Consider multiple lending sources to benchmark offers.

Human Oversight Integration

• Look for lenders that combine AI efficiency with human expertise.
• Ensure access to lending professionals for complex situations.
• Verify appeals processes for automated decisions.

Choosing A Lender: Red Flags And Best Practices

Beware, as some online lenders may miss crucial underwriting criteria that could harm your business. A recent example is when an automated lender’s system failed to properly account for a business’ existing automatic loan payments, resulting in an inflated cash flow calculation that led to an unsustainable loan offer—a mistake that human underwriting would likely have caught during bank statement review.

Warning Signs to Watch For:

• Lack of transparency about fees and terms
• Pressure to make quick decisions without proper documentation
• Unwillingness to explain their underwriting process
• No human point of contact for questions or issues

Best Practices For Small-Business Lender Selection:

• Request detailed explanations of their decision-making process.
• Ask about human oversight in the underwriting process.
• Review fee structures thoroughly.
• Verify data security measures.
• Check for industry-specific understanding.
• Confirm the appeals process.
• Validate regulatory compliance.

The Future Of Lending Solutions

When business owners are searching for small-business lending solutions, the future points toward more AI-integrated intelligent lending solutions that understand the unique rhythms of small businesses. However, as we embrace these AI technological advances, maintaining the human touch in final underwriting decisions remains crucial for sustainable lending practices.

At Upwise Capital, we’re witnessing AI revolutionize lending beyond the traditional “5 C’s of Credit” model. While technology has expanded financing options for business owners, the most effective lending platforms balance AI efficiency with human expertise. The key is finding lenders who maintain transparency in their processes and prioritize borrower protection while harnessing AI’s capabilities.

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