By: Azhar Hussaini

The traditional lending model is often challenging for small businesses. AI-powered underwriting is addressing some of these challenges.

An estimated 82% of small businesses face failure due to cash flow problems, with many struggling to access the funding they need to continue operating. Traditional banks often require a significant credit history and collateral, which can lock out growing businesses precisely when they need capital most.

Revenue-based financing (RBF) offers an alternative, but what’s truly innovative isn’t just the flexible repayment structure. It’s the sophisticated AI and alternative data that power underwriting decisions, enabling funding approvals much more quickly than the traditional process, for businesses that would likely be declined by conventional lenders.

The numbers illustrate the growth of the sector: the RBF market is estimated to have grown from $5.77 billion in 2024 to $9.77 billion in 2025, a projected 69.5% compound annual growth rate (CAGR), as businesses explore alternatives to the rigid requirements of traditional lending.

Beyond Credit Scores: The Alternative Data Revolution

Traditional bank underwriting relies on historical metrics: FICO scores, tax returns, and balance sheets. These static indicators show past performance but provide limited insight into a business’s current operations or future potential.

“The traditional banking model often overlooks the realities of how modern small businesses operate,” says Efraim Kandinov, CEO of Fundfi Merchant Funding, a New York-based RBF provider. “A restaurant that opened 18 months ago might have limited credit history but could be processing $500,000 in monthly credit card sales with strong unit economics. Traditional underwriting might reject that business. AI-powered underwriting, on the other hand, can see the opportunity.”

Modern RBF underwriting takes into account real-time business performance from various sources: daily credit card transactions, bank account cash flow patterns, point-of-sale inventory data, e-commerce platform metrics, subscription revenue trends, and even social media reputation. This comprehensive view reveals business health that traditional financial statements may miss.

“What’s exciting is how technology is expanding our ability to understand a business,” explains Natasha Dillon, CFO of Fundfi Merchant Funding, who oversees all underwriting and technology. “We’re not just looking at static financial statements anymore – we’re analyzing cash flow in real-time, tracking transaction velocity, and identifying seasonal patterns as they emerge. This data uncovers opportunities that traditional underwriting might overlook.”

How AI Transforms Underwriting

Artificial intelligence does more than process alternative data faster – it can identify patterns that human underwriters might not detect. Machine learning algorithms analyze thousands of historical funding decisions and outcomes, uncovering which data points have been found to most accurately predict repayment performance. AI may reveal, for example, that businesses in certain industries with specific transaction patterns tend to have a higher likelihood of repayment, even if their credit scores are below average.

Instead of applying a one-size-fits-all approach, AI creates customized risk profiles based on specific industries, transaction patterns, and growth stages. A seasonal florist, for instance, might be seen as high-risk traditionally due to fluctuating monthly revenue, but AI can recognize the predictable annual cycle and adjust accordingly.

AI systems also help with fraud detection, identifying suspicious patterns in revenue reporting, unusual transactions, or documentation red flags more effectively than manual reviews. By analyzing millions of data points, AI can highlight potential risks in real-time, improving overall accuracy.

The Speed Advantage

While traditional bank loans can take weeks or even months to process, RBF providers leveraging AI can make funding decisions in a matter of hours. Business owners complete a streamlined application, AI systems aggregate data from connected platforms, and algorithms analyze and generate offers within minutes. Underwriters then perform final reviews and quality control. Approved businesses typically receive funds within 24-48 hours.

“The speed at which we can now make informed funding decisions is something that might have seemed unimaginable just a few years ago,” says Dillon. “Our machine learning models process thousands of data points that would take a human underwriter days to review manually, and they do so in seconds, identifying patterns and correlations that humans simply wouldn’t detect. For a small business owner who needs capital to purchase inventory ahead of a busy season or to capitalize on a timely growth opportunity, that speed can make a significant difference.”

The Human Element Still Matters

Despite the advancements in AI, both Kandinov and Dillon emphasize that technology complements, rather than replaces, human judgment.

“Building an effective AI-driven underwriting system requires close coordination across technology, operations, and human expertise,” Dillon explains. “On the tech side, we’ve invested heavily in API integrations that connect to various data sources, machine learning models that continuously improve with each funding decision, and fraud detection algorithms capable of identifying anomalies in milliseconds. But technology alone isn’t enough. Our experienced underwriting team provides the necessary context and industry knowledge, handling edge cases and qualitative factors that algorithms might miss. This hybrid approach allows us to scale efficiently while maintaining the quality and personalized service that our clients rely on.”

This combination of technological sophistication and human expertise represents the future of small business lending.

The shift to AI-driven underwriting does come with challenges, particularly around data privacy and security. Businesses must provide access to sensitive financial data, and there is also the ongoing concern of algorithmic bias, which requires regular monitoring to ensure fair lending practices.

“Responsible use of AI requires constant attention,” Kandinov notes. “We regularly audit our algorithms and evaluate our approval rates across various business types, locations, and owner demographics to help ensure we are offering equitable access to capital. Technology should be an enabler of opportunity, not a restriction.”

Looking Forward

The RBF market is expected to grow significantly, with projections for it to reach $67.73 billion by 2029, reflecting a 62.3% CAGR. This growth reflects both the demand for flexible financing and the technological advancements, making it more scalable.

The effectiveness of AI-driven underwriting is being increasingly validated by institutional investors. Major platforms have attracted substantial institutional capital, and the Washington State Department of Commerce launched a $13 million government-backed RBF program in May 2025, recognizing revenue-based financing as a viable alternative to traditional banking.

As AI technology evolves and alternative data sources continue to expand, underwriting will become even more advanced, from real-time portfolio monitoring to prescriptive analytics suggesting optimal funding structures for each business.

“The businesses we serve don’t fit into traditional banking boxes, and that’s why we exist,” Dillon reflects. “Technology enables us to see beyond those limitations and assess each business on its own merits. By combining advanced AI with our team’s expertise and a genuine commitment to supporting small business growth, we can offer capital to businesses that are driving the economy of tomorrow.”

The future of small business financing may no longer hinge on ideal credit scores or collateral. Instead, it may depend on the ideal data and the most sophisticated algorithms to interpret it.

About Fundfi Merchant Funding

Fundfi Merchant Funding is a leading provider of revenue-based financing solutions for small and medium-sized businesses across the United States and Canada. Founded in 2020 and headquartered in New York, Fundfi offers flexible funding with repayment terms that adapt to business performance. For more information, visit www.fundfimerchantfunding.com.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial, investment, or business advice. Any financial decisions made based on the content of this article are at the reader’s own risk. It is recommended to consult with a qualified financial advisor before making any financial or investment decisions.