Fintech Revealed: Understanding Small Business Credit With Nav

Welcome back to the occasional series on the podcast called Fintech Revealed. This is a sponsored show where we take a deep dive into one topic with a couple of industry experts.

Today, we are focusing on small business credit with Levi King, the CEO of Nav and Gerri Detweiler, a credit expert and educational consultant. We provide listeners with a clear understanding of how small business credit reporting works and why it is so different to consumer credit. We talk about open banking and how cash flow underwriting helps more small businesses get approved for credit and at a lower rate.

Levi traces Nav’s evolution from a credit data tracking platform to a comprehensive financial health solution that now facilitates embedded lending through partners like Fundbox, while Gerri emphasizes the educational mission of helping business owners understand their business credit profile and why scores that can vary wildly between bureaus.

Both express optimism about the future of small business lending, particularly the rise of embedded financing that leverages diverse data sources from vertical SaaS platforms and the shift in lender attitudes from “extracting a pound of flesh” to genuinely advocating for small business success.

In this podcast you will learn:

• How Nav has evolved since I last had Levi on the show in 2017.
• The types of small businesses that are coming to Nav.
• The main differences between a business and personal credit report.
• How Nav works with partners today.
• What they are doing to help small business owners get educated.
• What it takes to become a Nav partner today.
• How they integrate the huge number of small business data sources.
• What it is like convincing small business owners to connect their bank data.
• How cash flow underwriting is change the game for small business lending.
• How they are using AI to analyze the myriad data sources.
• Some of the surprising insights they have gleaned from this data.
• What trends they are seeing that contradict conventional wisdom.
• What needs to happen next to move the industry forward.
• Why they are optimistic about where the industry is headed.

Fintech Revealed Podcast: Small Business Lending with Nav

Peter Renton:

Welcome to the latest episode of Fintech Revealed. This is our occasional series where we go deep on one topic with a couple of subject matter experts. Today, we are doing a deep dive on small business credit with Levi King, CEO and co-founder of Nav, and Jerry Detweiler, a credit expert and educational consultant for the company. Nav has emerged as a leading platform helping small business owners understand, build and manage business credit profiles, which I think is super important. They do this through education as well as integrations with credit bureaus, data providers, and an extensive marketplace of lending partners. During our wide ranging conversation, we talk about business credit bureaus, the challenges of data fragmentation, leveraging AI and business credit, cashflow underwriting, embedded lending, how to move the industry forward, and much more. So without any further ado, let’s get on with the show.

Welcome to the show Levi and Gerri.

Levi King:

Thanks, it’s great to be here.

Gerri Detweiler:

Pleasure to be here.

PR: Great to have you both excited about this conversation. Small business lending is a favorite topic of mine, but I wanted to kick it off. Just maybe let’s start with some quick intros. I know Levi, I’ve had you on the show before a long time ago. Just do a little bit of background intro each of you. Levi, why don’t you go first?

LK: I’ve been working with Gerri for a long time, but I started off my career as a small business owner. I sold three, actually five small businesses in my 20s in different industries and really struggled to understand how credit and financing applied to me as a small business owner. There were a lot of places you could go to learn, as a consumer, what does this all mean? But nothing as a small business owner. It was very different industry to industry. So I wanted to solve that, that challenge for small businesses on a large scale. So I co-founded Lendio with Brock Blake, who’s still the CEO. And we did a good job solving the, where can I get financing? What am I qualified for right now? But we didn’t really get into, ⁓ okay, well, why is this what you’re qualified for or why are you not qualified for anything? So kind of that itch that so many entrepreneurs have to understand, you how are third parties making risk-based decisions on my business? Financing is the most common example.

We think of cars, we think of loans, but net 30 is a lot more common type of financing than either cards or loans. But your insurance provider, your virtual processing provider, there’s lots of ways that your kind of data as a small business impacts your pricing or whether you can do business with a vendor, supplier, creditor. And so once we were out of the woods at Lendio, I left to start Nav because I just had that itch I had to scratch to say, okay, well, what about your data? How do we help you understand and improve your data over time? And then know with high certainty, based on where your data is at, what business credit card can you get? What business loan can you get? Are you with the right bank? know, all these kind of foundational or just business expansion questions that come up on a regular basis. So that was the basis for now. If I was inspired by Credit Karma and what they were doing for consumers, said, hey, can we do something for free that can have a broad reach and then figure out ways to make money on a free business model.

PR: Right. Gotcha. Gotcha. Okay. Gerri.

GD: Yeah, I’m Jerry Detweiler. started my career in ⁓ advocacy, credit advocacy on Capitol Hill, got to work on things like the legislation that brought consumers free credit scores back in the day and plain English credit reports. And it was when I wrote my fifth book, Finance Your Own Business, I interviewed Levi King for ⁓ that book. And then the book came out and I ended up working there full time.

And like Levi, the reason I was excited was because I saw what had happened. I’d seen the evolution in the consumer space, right? But when I started, you literally would have to go to the credit bureau to get your credit report. So I saw that evolution and I saw that Nav was going to bring that evolution to small business owners. And so I was super excited to be part of that team.

PR: Right, right. Yes, yes, indeed. Well, great to hear like a little bit of a background. I, and Levi, I want to turn to you because I’m, last chatted in 2017. I’ll link to that show in the show notes, but it was eight years ago now. A few things have changed since then. I’d love to kind of get, just describe sort of the kind of ebbs and flows of Nav’s business and your, and your business model. You’ve gone through the pandemic. But what’s happening now at Nav over the last few years?

LK: Back when we spoke, we we’ve done a great job through our integrations with consumer credit bureaus, the commercial credit bureaus and Plaid, Yodlee, MX, those types for cashflow data. We’ve done a great job helping you track your data. You know, look for errors, see how am I doing. But we hadn’t done a lot around product to say, OK, now here’s how to leverage that data and here’s how to improve that data. And so those features have evolved and grown substantially since 2017 so that it’s a lot more actionable. Okay, great. I’ve got this tax lien on my business credit. What do do about it? I’m bouncing two checks a month. How can I better manage my cashflow so I don’t get insufficient funds piling up? And then there’s lots of lenders that won’t do business with you if you have that kind of track record. During COVID, so getting financing has always been a feature of our platform whereas with Lendio, that’s the business model. We’re gonna help you get financing. At Nav, its, we’re gonna help you understand and improve and leverage your data and getting financing is an important feature of the platform. But during COVID, unlike any other recession or disruption we’d seen in the economy in my lifetime, it was the first time lenders stopped lending. And so our business model, we have a free version of our software. We have a premium version you can upgrade to pay for to get some bells and whistles. But then there’s a marketplace where we make recommendations based on your data. And we’d seen the ups and downs. Credit markets tighten when the economy’s tight and small business owners are suffering but nobody stopped lending. didn’t get out, you know, pause their business. And that happened with virtually every commercial lender for a period of time during COVID. And even the large FIs, they kind of kept the lights on with their programs, but most of them turned off their, their affiliate or acquisition programs for their SMB cards, with the exception of American Express, but they, tightened it down really tight. So was tough to get approved for anything. And so for us, we turned our attention to, okay, the only way you can solve for financing right now is through PPP.

So we facilitated billions of dollars in PPP financing through various partners. But we that was a moment in time. So that was just a critical moment in time for our customers. And so as you know, little by little, lenders came back into the market, initially with really tight underwriting boxes, tighter in some industries than others. And then things kind of got back to normal within 18, 24 months. And so for us, it was a headwind at first because we lost 20 to 30 % of our revenues over a 30 to 60 day period. But we really got the tailwinds of COVID in a crazy way. So we were one of those that experienced both sides. Because you have all these small business owners that could get financing yesterday that can’t today. They’re like, well, something must be off on my data. And so we just saw crazy organic growth over the next couple of years. Turned off our customer acquisition machines, know, spending a million bucks a month on direct customer acquisition, dialed it back to zero, and then had record growth for a period of time. So really underscored, like when things are tough, like you got to understand your data, you really got to be buttoned up and you shouldn’t be lackadaisical and wait for a crisis. Like get ahead of it and make sure you have options, line of credit that you can tap into, business credit card that you can lean on, et cetera. And so the business model is fundamentally what we hoped it would be when we started with our rickety product years ago. We bring in the personal credit, business credit, cash flows. We advise around that data to help you make smarter financial decisions. We have almost 100,000 that pay for our software subscription and then about a million overall that engage with our software. So there’s a huge benefit that our free product’s not a trick to get you to pay us something. It’s a really robust product. And so then of course, whether you’re paying us or not, we’re gonna make recommendations that we think are best for you. And in some cases, like with our integration with Fundbox, we call them Nav loans. It’s soup to nuts inside of our platform. You get approved before you apply based on the data we have, and you say, want the loan. You take your advances, you make your payments all through our platform. And so it’s kind of the original concept still here, but just way deeper in value, no matter what direction you look.

PR: Okay, so turning to you, Jerry, I’d love to get a sense of who these small businesses are that are coming to Nav. What do you know about them?

GD: Well, that’s one of the challenges, of course, with working with the small business audience is that they’re very diverse. So, Nav’s customer base is in a variety of industries, management services, real estate, transportation happen to be three of our larger segments, but we have businesses across the spectrum. ⁓ We do have about 60 % of our customers have been in business for two years or longer. And if we look at their credit scores, which is one of the reasons they are coming to Nav is to learn about their credit, we find that it’s about half of them have an Experian business credit score that would put them in the medium to low risk category, but about 40 % have no credit score at all. And unlike when you check your consumer credit report and you often see that your scores across the bureaus are pretty similar, the scores can be very, very different among bureaus. And we can talk about that a little bit later, but that is one of the challenges is speaking to the business owner where they’re at when there’s so many different types of businesses and businesses at different stages coming in to have for help.

PR: Yeah, that’s a good point. The average person these days knows their credit score or there’s a lot of more awareness than there ever has been. And that wasn’t the case, you know, a while back. What did you say is the, is the core difference? Cause I mean, a lot of small business lenders just use the personal credit score very much front and center when they’re doing a small business loan. What would you say are the core differences between the business credit score and a personal credit?

GD: That’s part of the education that we focus on at Nav is explaining to business owners that this is going to be a different experience than you’re used to with consumer credit, which again, is so much more standardized than it was when I started in this industry. There’s a few key differences that the business owner needs to keep in mind, but that also affects the data sources that NavVis seen. And that is things like the fact that on business credit reports, they don’t tell you who the creditors are. They tell you the type of account it is type of trade line, maybe utilities, maybe a bank card, maybe it’s a term loan, but they don’t tell you who’s making that. Often credit limits are not reported and instead they’ll substitute highest balance. And then we don’t have the same regulations with business credit that we do with consumer credit. And the regulations are part of the reason that consumer credit is so transparent and so ubiquitous today is because, you know, Congress said, you need to show consumers everything in their credit report. It needs to be in a way that they can understand it. And the general regulatory environment for business has been, well, businesses are sophisticated. They should hire advisors to tell them what they don’t know. And as we know at Nav, that a lot of business owners are very small businesses, and they might not have those resources to have someone explain it. So they have to turn to other sources to figure this out.

PR: Gotcha, gotcha. So Levi, what’s your perspective here on the small business credit does seem to be fundamentally more difficult to kind of get a handle on for the average person than Ike, a personal credit report.

LK: Yeah, few things that I’d add to Jerry’s comments. One is in the consumer space, there’s pretty high data consistency bureau to bureau. So if you’re looking at one report, you’re pretty much going to see what you’re going see in another report. The scores are to be very similar. In business credit, there’s low data consistency bureau to bureau. And so you really need to keep an eye on all three. There’s also not a FICO score for business. I mean, there actually is. It’s the FICO SPSS score that’s used primarily by banks, credit unions, and for SBA lending. But within the three bureaus, they each have their own set of scores, but there isn’t one that’s just the standard where, know, hey, if I keep my eye on this, I know I’m good to go. And so that makes it challenging as well. So you may have a really high Dun & Bradstreet score and a really low score with Experian and not even have a score with Equifax. And that’s because they have different types of data coverage. They kind of over index like DMV really dominates the trade credit space. Equifax has a lot more leasing data than the other folks. They’ve got a lot more utility data. And so that even utility data, that makes it confusing. There’s a lot of data that reports in the commercial bureaus that as consumers, don’t, it doesn’t report to our credit. Experian Boost and their consumer group, trying to change those things. But by and large, different data sets, low data consistency, high variability in how the scores work and what they mean for the small business owner. And then the scenarios are confusing.

As a consumer, we use our credit in four or five ways, where it impacts us in four or five ways. And in each of those ways, like mortgage, it’s substantially similar lender to lender, how they use your credit score and how they look at your credit. Whereas if you get into SMB, there’s dozens of ways that your credit is used and it varies highly lender to lender. As you know, in alt lending, sometimes business credit doesn’t matter. It’s personal credit, there’s some minimum. Business credit, a lot of times they’re looking for like a tax lien or judgment or something like that but they’re not really looking to approve you based on your business credit. They’re looking to turn you down potentially based on your business credit. But it’s the cash flow. Cash flow is king in lots of types of alt lending. A lender will overlook issues with the business credit if you get really strong cash flows. And that’s then fundamentally different if you want an SBA loan. And so the scenarios are just highly varied on what score is going to be pulled, what report is going to be pulled in conjunction with what other data sets. As you can imagine, like a miserable problem to solve over the years to try to help you understand all that data through the lens of so many different scenarios that you might be trying to accomplish in your business.

PR: Right, right, gotcha. Okay, so I want to move on to like industry partnerships and the ecosystem that you have built at Nav. I think it’s really quite impressive. Maybe Levi, just start with you again. Like how does Nav work with partners today?

LK: I’ll kind of divide it in traffic in traffic out. So we have a ton of partnerships where what we do is relevant to what they’re doing and they want to educate their audience or there’s a lot of these private lenders that were a part of their turn down flows. So if they’re not going to prove somebody for financing, it’s kind of a soft letdown. Say, hey, go to Nav so you can understand the reasons we couldn’t give you a loan. And then we have our marketplace configured. So competitive offers won’t show up and they’ll just go back to that lender that was the source of the customer. But we get traffic from GoDaddy, from the credit bureaus themselves. You can’t get your Equifax business credit report from Equifax. So we traffic from the bureaus in different ways, Experian’s doing some cross-selling in the consumer group where they’ve identified small business owners and they’ve got that brand trust with the consumer and they say, hey, go check your business credit. And so there’s a ton of different scenarios where we bring traffic in.

And then on the traffic outside, we’ve historically really focused on business credit cards and business loans. And we’re pretty strict from an ethics perspective. I personally, and as a business, we’re kind of agnostic to the cost of financing because unlike a consumer where there’s no responsible scenario, you should finance a TV at 50 % to watch the Super Bowl. It’s always, what are you trying to accomplish? And does it pencil out the cost of this money? We’re really strict about sales ethics and disclosure ethics and collections ethics and things like that. So we have partners that cover most of the credit stack subprime to prime. That’s true in business credit cards. That’s true in business loans. And then this year we’ve one place I would say we’ve probably not added the value we could have to our customers and is our big swing on the look forward. And we’ll probably talk about later is bringing some order to the highly, highly fragmented trade and supplier credit ecosystem, which from a TAM perspective is four to five times bigger than all lending and cards in the U.S. to small businesses. And so half of our customers are B2B. And so they’re working with suppliers and vendors and maybe they get net 30 terms, but they need net 60 terms. And so we’re working hard to add lots of vendors and credit suppliers to the marketplace. We dabble in insurance. We’re not that good at it. I’m like really authentic. Don’t oversell where we’re actually at. Still haven’t cracked that nut of insurance recommendations. Make other recommendations like, you should form an entity. You were sole prop when you started. Lots of people start out that way. You got $700,000 in revenues, but you’re profitable and lot of liability in your B2B manufacturing business or whatever it might be. So there’s a lot of kind of random recommendations we’ll make that’ll just help them stay buttoned up and improve their odds for better options in the future. When we’re looking at the who will we send customers to, we’re looking at who can serve our customers on a broad basis, whose niche. So do you just lend to the healthcare space? Okay, we got tens of thousands of customers in that space. And so we just a lot of scrutiny around the business itself, its reputation. And then we will partner with folks, then really track hard the performance and how are our customers being treated and things like that.

PR: Okay, Linda, what about on the educational side? Jerry, maybe turning to you, who are you partnering with there?

GD: Yes, some of our important partners on the education side have been groups like SCORE and the Small Business Development Centers. Small Business Development Centers are located across the country. Their advisors are talking to business owners every day. They serve thousands of business owners each ⁓ month in multiple centers. And so we’re there to help educate the educators. So we actually have developed a number of programs to teach them about these topics so then they can help their clients and of course, hopefully recommend Nav as a place to get the information that they can’t get elsewhere. So it’s taken a long time, but it’s been a good relationship over time because they are so focused on trying to help ⁓ their audience be successful financially.

PR: Right, right. Gotcha, gotcha. Okay. So then Levi, what’s it take to become a Nav partner today?

LK: If it’s traffic in, there’s relatively low requirements. If you’re going to send us folks so that they can improve their credit financial health and have better options, like by and large, we’ll take that traffic. As far as traffic out, you got to be doing something unique. At some point, it’s diminishing returns to add yet another line of credit provider that isn’t differentiated from an underwriting perspective or spectrum of risk or product features perspective. But you see it’s always evolving. So the most recent one we did was with Fundbox where we’d been partnered with them forever, but now they’ve got soup to nuts embedded. And so we took it to the next step, call it Nav loans. If you’re a Nav customer, don’t get approved without applying. Just have that approval kind of live and breathe inside of your account for when you need the money. Say, I want the money pointed to your checking account and make your payments all within the NAB platform. So that was a capability that not a lot of folks have. And so we did a lot of diligence on the players. We’ll probably add Kanmon will be the next that will offer because what they do is complimentary enough to the Fundbox that it’s not just somebody doing the same. And so you really got to be solving a problem that we don’t currently solve for our customers in some way, shape or form. So that can be industry specific. It could be product specific. There’s no end to us saying, how do we help our customers have better credit and financial health so that they can run a more profitable business, expand the business, access capital, et cetera. Like our measure of success is, your odds of succeeding long-term higher because you’re a Nav customer? And where in your journey did you join and see that inflection point?

PR: Right, right, right. Okay, so I want to talk about now, I think one of the really, one of the important pieces of the whole small business lending puzzle, and that is data sources and connectivity to these sources, because in small businesses, the data is very disparate. There’s huge numbers of data sources. Maybe just, let’s start, Levi, I’d love to go to you and talk about this, you know, the fragmentation of these data sources, how you deal with that and what’s it like trying to integrate sometimes dozens of different data sources.

LK: Yeah, that’s a great question. A lot of the work we did was pioneering. So I’ll give you a real example. I pitched Will Lansing in person on letting us expose the FICO SPSS score to small businesses because there was no, you could turn down for an SBA loan. You can’t understand it. There’s no content out there. There’s nothing you can do about it, let alone see your score. And I tried like crazy to close them because I’m like, I’m never going to get a chance to meet with Will Lansing again. I didn’t close them in person. Didn’t even get a handshake, but we ultimately did partner with them. And there was a lot of heavy lifting to say, okay, for them, not just on our side of the line to say like, okay, how do we expose this through an API so that Nav can show it to their customers? How can we do that? And it’s not a hard pull that had never existed in the FICO SPS scoring model. It says, know, the consumer data, the commercial data and financial data flows into that score. So there was a lot of trailblazing in the early years, especially on just the matching.

So in the consumer space, if an inquiry goes into the credit bureau through an API, you’ve got date of birth, social, address, and name. So you’ve got those four things that are trying to triangulate to service the right credit report. And three of the four got to be pretty accurate, I think, is the requirement. In the commercial space, you need a business name and a zip code. And so it’s ripe for mismatches. There’s all kinds of errors in the reporting or they’ll have duplicate records. And so just solving the problem of how do we, through an API, find the right business credit report and surface that to our customer?

And that’s a challenge in a lot smaller challenge now, but historically is a real challenge with the business credit bureaus and not unique to us that it was a challenge for lenders that were trying to hit those APIs. And then of course, the other kind of broad set is the open banking world. So you’ve got course Plaid, MX, Yodlee, Fiserv has a direct product and none of them are perfect. So you need more than one provider in summer like MX or it’s a lot better as far as connectivity into FIs, because a lot of their relationships are front door, Plaid, some of their relationships are back door. And so there isn’t, you can’t go to a single aggregator and solve your connectivity issues. And so then there’s a complexity of, okay, great. Now we’ve got two different data sets or three different data sets, same type of data coming from the same checking account, but formatted differently from those different providers. And so, you know, these challenges that we have to turn it into educational UI UX or user interface…imagine the lenders, they all have the same problem, except they’re translating it into an underwriting user experience for the folks behind the line trying to make decisions. And then you mix in accounting data, there’s just so many other data sources. So that’s just a challenge that never ends. Fortunately, it gets a lot easier with AI nowadays, but it’s an ongoing part of the business. The bureaus are always trying to update their APIs to make things better, plan newly, know, chase right now is causing misery for all of those connectivity providers.

And so it never ends with what data sources you need to tap into and what’s happening with that data and how do you interpret the data. And none of the aggregators have great SMB categorization and cleansing of their data. So that’s all stuff we had to build on our side of the line. And I know most of our lender partners, they all had to build it on their side of the line. And then you can imagine the inconsistency. We may be interpreting the data one way, send our customer to a lender who interprets it a different way. And so we think based on our data science, slam dunk for this loan unless we have a pre-approval API, which is a whole other set of APIs that are imperfect. Maybe you don’t get approved where we thought you had 100 % certainty to get approved for this loan and then of that’s not a great user experience.

PR: Right, right. Yeah, for sure. For sure. So I do want to expand on this open banking question and connecting bank accounts that Liv, I was just mentioning there. So Jerry, tell us about how business owners react when asked to connect their bank account. What’s, is there pushback there? What’s that like?

GD: It has been a challenge in some cases because the business owner is very hesitant to hand over that data without seeing a clear use case for how it’s going to benefit them. And I shouldn’t say hand over the data, but even connect the data. ⁓ And if they are, and what we found is if they’re already using another service, say to monitor their cashflow, for example, they might say, well, why do I need to have to do this? I’m already doing it somewhere else. So they need to see a connection. the other hand, when they do connect it, we are seeing better results on the lending side. And so there is a benefit potentially to, know, nav customers who engage fully with the platform, which means, you know, not just their credit data, but also their cashflow data.

Giving us the information about their business income and the other things that lenders need to make a decision. What we found is that customers who are cashflow connected are 20 % more likely to be approved for financing than those who aren’t. So there’s a direct benefit, but we do have to really educate the customer to get them to get into that and get into that flow before they need it. That’s one of the other big issues with small business financing. It’s just that many times business owners wait until it’s very urgent and then they’re stuck with whatever’s pitched to them the best or the fastest, regardless of whether it’s the best for them.

PR: That reactivity is really a problem because if you’re going to find it, you’re trying to get financing when you desperately need it, it’s not going to be an optimal solution for you. Do you also find that they can get better financing, like cheaper interest rates when they’re connecting their bank account?

GD: We do tend to see better terms when they are cashflow connected. So yes, that is a benefit to our customers. I can’t say specifically on the interest rates, we don’t always have the insight into what interest rate they were approved for by a lender. But overall, we’re seeing better terms for those cashflow connected customers.

PR: So Levi, you think is cashflow underwriting? I did a whole episode on it a few months back. I’m a big fan of that, that particular type of underwriting. How is it changing the game for small business lending Levi?

LK: I also am a massive fan. think back to my first company, Electric Sign Manufacturing, where I was running two, $300,000 a month for my checking account. And Idaho Independent Bank approved me for a $5,000 credit card. Of course, I didn’t understand how any of this worked. And I went in there just mad as hell, look at how much money at any given moment I’ve got 30 grand in my checking account or whatever it was, and you’ll give me $5,000 in credit. And so I think of those early days and I think of cash flow underwriting first from the perspective of the small business owner, which is simply speed to funds. The velocity of things happening in your small business sometimes you don’t have the luxury to plan ahead. You’re working towards the Christmas season, you’re retailer, know, one of your suppliers says, hey, we just got to this batch of inventory, we can give it to you 50 % off, but you need to make a decision in the next 24 hours, you can’t go apply for a loan with your bank, and maybe your business credit card doesn’t have a high enough limit. So speed to funds to me is the best benefit to the small business owner ever as it relates to cashflow underwriting.

But of course, the other side of the coin is true for the lender. They can deploy capital a lot more quickly, they get paid back on different cycles, and there’s the before you get the loan and after, and then just to stay tied into the cash flow, the fact that on a dynamic basis, a lot of these lenders that offer a line of credit, it might go down, it might go up, but as you make progress in your business, you have to reapply. Your limit just keeps going up on the capital you can access, and so it’s that real-time visibility, whereas historically it was…everything was rearward looking underwriting. There was nothing that was like, hey, what about this minute right now? Cause you could have great rearward financials and you just lost three of your biggest customers today and now your cashflow is cut in half. So you need a loan to keep the lights on. Lenders aren’t super excited about that scenario. Nowadays they can see that. It’s like, okay, what happened? Your cashflow got cut in half. No, this isn’t going to work out. And so to me, just having been a small business owner and how things just came up and you had very little time to capitalize on the opportunity that was in front of you that, you know, speed to money. That’s the biggest advantage. Then dynamic products, like I said, a line of credit that can go up or down based on what’s happening in the business. Whereas I remember my SBA 7(a) express line of credit. was once a year they’d take a look at it. That was it. You can go mid-year and say, hey, look, I’ve doubled my revenues. I need a bigger line. Like, no, we’ll look at it once a year. Tough luck. And when they did, it was this long two-month process. So it’s like once a year, but really that you’re going to have 10 months of access, whatever the post-judgment on your limit of that line of credit is.

PR: Right, right, right. Okay, so let’s move on to ⁓ AI and technology. And I know that you touched on this Levi. I think this is so important. I think it’s really because the data sources are so widely spread, there’s huge numbers of them. AI seems like to me is a, you know, could be a game changer here. So what are you doing when it comes to using AI to, you know, to analyze all the myriad data sources?

LK: You know, after 12, 13 years, we’ve amassed a lot of data. As I mentioned, our active users of a million or so on the users that aren’t paying us, we still have all the data. We just aren’t allowed to expose all the data to them unless they upgrade to our software subscription. But we also have our historical data on people that have went out of business or that may still be in business, but churned out of our product. And so when we looked in the early days at AI, and I mean, going back, I don’t know, seven years when there was first noise around this stuff. The AI models were worse than the machine learning models that we were using. And so, and we have a lot of data back then and we have a heck of a lot more data. That’s kind of the first thing is you really have to have a lot of data or you can’t solve for the edge cases. And when you’ve got a million users, there’s a million edge cases. So it isn’t like you got to solve like 10 or 12 edge cases. And then just the complexity we talked about before where the advice to business owner A, it looks identical on paper as far as revenues, time in business, blah, blah but you’re in landscaping in Florida and the other one’s landscaping in Maine, which means there’s snow removal in the winter, there’s still nuances. And so now it’s a lot better, I’ll tell you that much.

And so for us, it’s AI in two ways. One is helping you understand and take action on your data. We don’t label our AI assistant as AI. There’s lots of reasons for that one is that that’s hot and sexy in certain circles now, but to a small business owner, they just care your advice and sound.  They don’t care whether it’s AI or not. And two is I think there’s some distrust in AI broadly that we’ll go through a phase where that’s true and hopefully it’ll taper off. You don’t want to scare someone away from a good solid recommendations like, what does this AI know if you don’t and people are nervous. So there’s the ethics side of it. But but that’s one side is helping you understand your data. The other is with a lot of our lending partners, they expose their black box. So like with Fundbox, it’s fully exposed. We know how they’re going to underwrite. That’s why folks can get approved without applying for financing. But there’s other big FIs like American Express isn’t going to disclose their underwriting box to us. And so we make recommendations for Amex business cards with pretty high confidence in lot of cases, but there’s some long tail reason on why they’re not. Like maybe they have too many inquiries on their consumer credit, everything else looks great. Or one that we uncovered that I found fascinating is, and I haven’t looked at this for a while, but we discovered American Express would approve you for a business credit card with a really low consumer score if you had previously been an American Express customer with no delinquencies.

So it’s just like this crazy random example where you could actually get a card that we never would guess you could get approved for that business card. So AI is good in cleaning up kind of the long tail of the black box that they’re not going to disclose that we can discover. It’s not a loophole, right? That’s deliberately in their model. They know, okay, this person, maybe they defaulted on three other cards, but they were loyal to this brand. So let’s take a risk on them, but they’re not going to expose that anywhere and make that known. But they would love to get that customer from us. our customer would love to that card. You want to talk about somebody who’s delighted in our business model, got a 550 credit score and I got approved from an American Express business credit card, right? And so AI is really good at figuring out things that we just never, before that we could just never really put our finger on.

PR: Right, right. Okay. Okay. So Gerri, like just talking about all the data that, you know, that Liv, I was just sort of referring to there. What are some of the surprising insights that, that you’ve gleaned from all of this data?

GD: Well, one insight we recently discovered was that about 40 % of our cashflow connected customers have buy now pay later accounts that they’re paying on. So if you think about it in terms of business credit, Levi mentioned net 30 vendors, and these are suppliers or vendors who essentially let you buy now and pay later. And that’s a big part of small business financing. It’s also been something that a lot of our customers have expressed a lot of interest in. One of our most popular articles on the blog, for example, is where to find this type of trade credit. So that’s something that Nav is really, we’re doubling down on working in that space to help our customers find what they need so they can take advantage of not necessarily traditional BNPL like maybe Klarna or something, but for a trade credit that helps them get what they need. And Levi experienced this in his own sign business. So I’m often referring to his example of, you know, needing to get the concrete and the plastic and everything else you needed to manufacture your signs and then get paid later. And there’s millions of businesses that are stocking up on whatever it is they need for their business and then trying to pay for it out of cashflow. And this can help them do that.

PR: Interesting. Yeah. The whole BNPL for small business space is still fairly nascent, I, know, consumers love it. And I think small business owners will love it even more, you know, if they can get that sort of trade credit, so that’s really interesting. Then maybe we can talk about trends that maybe are contradicting conventional wisdom about small business learning. Do you have anything there?

LK: Yeah, I guess there’s a few that I would would mention. The first is it’s very intuitive to everyone that the number one concern is cost of capital. And we touched on this a little bit earlier in many, many scenarios. I would say the majority of scenarios is speed to the capital and the right amount of capital, way more than it is the cost of the capital. A lot of times they have the margin. They’re not going to love a higher cost of capital. But if it’s easy and they can get right back to work inside of the business instead of spending 30 days on mound of paperwork to get approved, that’s always gonna win. Speed and ease is gonna win over cost almost all day long, with the exception of like really big projects that are gonna get amortized over a period of years or whatever. Another one is, and I wouldn’t call this conventional wisdom outside of FinTech in this kind of mud puddle of the world that we feel like is massive, but outside of FinTech, there’s a much bigger world. And that is small business owners are still drawn to financing that they can really clearly understand. And whereas we’re like, you got all these fancy, you private lending products that are daily repayment, this kind of stuff, it’s really hard to understand. It’s hard to trust. So, you know, we’ll see in our marketplace recommendations, you got a 35 % chance of getting approved for this Capital One Spark for Business card and a 100 % chance of getting approved for this line of credit, apply business credit card, right? It’s like they understand it. They know what that logo on the card means. They understand how it works.

And so that’s the one thing that surprised me in this space. I remember talking to Noah Breslow about this years ago when he was the CEO of OnDeck. Like wrap your line of credit in plastic. You’ll get a lot higher usage because they just understand that, it’s in the wallet. And a few lenders have done that. But I think that it’s not obvious. I think conventional wisdom is like you give them cash, they’ll understand it, they’ll take it. And that’s true the more desperate that they are. But it’s not true broadly. They still want products they understand as a consumer, right? You don’t have these same types of products or daily repayment because I bought a TV and I financed it. There’s no such thing.

PR: Right. And that’s the thing about small business lending. It’s inherently more complex and there’s more options because you want to buy a pizza oven or whatever. There’s like seven different ways you can do that. You can go get a business credit card, you can go get a line of credit, you can go get equipment financing. Maybe there’s going to be a bank loan even potentially. There’s all the different things that I think makes it inherently complex where the consumer, it’s, know, okay. Is it a credit card? Maybe I can get a BMPL. That’s about it. But anyway, I want to move over to you, Gerri, and give you a chance to talk about some of the things that you’re seeing that maybe contradict, you know, conventional wisdom.

GD: Well, I think when it comes to, you know, the small business owners that I’m talking to, you know, a lot of them seem to think that it’s all or nothing. Right. And so I guess the conventional wisdom that they have in their mind is sort of touches on what Levi said. If I need a loan, I’m going to go to my bank. And that’s for many of Nav’s customers and many small business owners. That’s probably not the most realistic option for them. And so guiding them in terms of thinking about putting the different pieces together so it’s not just one product, in many cases they won’t be able to solve their issue with one product. So that’s one piece. And then the other one that I hear most often from small business owners I’m talking to is, you know, I’ll ask, you know, what’s a good business credit score? Have you checked your business credit score?

Often there’s two answers there. One is they’ll give me a range for consumer scores. So they’ll say a good credit score is 700. And there’s many different ranges for business credit scores. And you go from zero to 100, to 300, to 850, to 1,062. They’re much, much different. And then when it comes to checking their credit score, they are often like, well, I, you know, I pay my bills on time or I don’t use a lot of credit, so don’t really need to. And I’ll just get one little other piece that I learned while I was at Nav. During the pandemic, when things were crazy and we were all working seven days a week to try and help, you know, business owners, I was hit by business and personal identity theft at the same time. The only reason it wasn’t a really, yeah.

The only reason it wasn’t a really bad situation was because I caught it quickly. I was monitoring my credit. And so I saw those inquiries pop up. I see one from the SBA and I’m knowing immediately that someone has tried to apply for an SBA loan under my business name. And so was able to resolve it very quickly. But that’s another thing I like to talk to small business owners about because the lack of visibility into their business credit does make them more vulnerable for things like fraud. Like when consumer credit, we’re so used to the whole credit, Life Lock really, you know, made us aware of trying to watch our consumer credit. The same thing applies on business credit. You can’t freeze business credit reports. And really, I’m just saying this quite honestly, is the place to go right now. If you want to, if you want to stay on top of your business credit, that’s where you’re going to do it.

PR: That criminal should have realized that I shouldn’t mess with Jerry because you write about this sort of stuff. And so it would be much harder to steal your business credit than somebody else’s, I’m guessing. Anyway, before we close, I do want to touch on a couple of different things here that I think would be interesting. Because I feel like, Levi, we’ve come a long way, I think since you started Nav, I mean, for a small business owner, think access to credit, all the ways they can connect through APIs as we’ve talked about. I mean, feel like we’ve come a long way in small business lending to get better access to credit for the small business owners, but we still got a ways to go. I’m sure you would agree, right? So what needs to happen next to move the industry forward?

LK: There’s a few things. ⁓ One is, you know, this this new wave of embedded small business lending. It’s the natural evolution. Advance America, now CAN Capital didn’t exist when I started my first company. And so, you I don’t know if they were officially the first, but they kicked it off. And then kind of the next wave was embedded financing within a captive ecosystem. So PayPal just going to lend to my customers. They’re already my customers. I already got the data…Square Intuit. Right. There’s those examples. And this next wave is just these creative lenders that are saying, hey, can I use Housecall ProData to make a lending decision? Can I use any data set in any vertical SaaS or any type of platform, even within the nav platform, Fundbox is using proprietary data so that the nav alone is you can only get if you’re one of our customers. And so to me, that’s what’s exciting is that’s thanks to everything else becoming digitized for small business owners. When I raised money with Brock Blake in the late 2000s for Lendio, I don’t can tell you how many dozens of venture capitalists said this phrase SMB is the graveyard of venture capital investments. Like no money was going into SMB. And then of course that all changed dramatically over the last 15 years. And then there’s one other change that has been subtle. And that is I really feel like a lot of companies in the 2000s and even into the 2015 and maybe a little beyond. The attitude when I would meet the founder of somebody trying to serve small business was like, I’m going to extract a pound of flesh. Like these are subjects by which I’m going to make money. And then people started to figure out if you extract a pound of flesh, they go out of business. And so how does that benefit you long-term? And so I just think the attitude amongst founders in that question, name names, could, I could name a ton that are, they truly, they wake up every day and their team wakes up. say, how can we improve the odds that our customers succeed? And that all of that, it could be MarTech, it could be CRMs, right? There’s tons of different types of tech outside of FinTech that are helping small business owners succeed in different parts of the business. And then you got all these smart creditors saying like, look at every one of those examples saying like, can I use that data to extend money to the small business owner? And I got to charge enough to make money, but I can’t charge so much that they either say no to the money or I increase the odds they actually go out of business. And so just the whole attitude in the ecosystem to realizing like, we’ve got to be their friend. We got to be their advocate. I honestly believe that is fundamentally changed amongst the founder groups, venture capitalists across the board that are serving small business owners. that if you overlay those two things, the now embedded financing and credit is showing up all over the place. And you’ve got a generation of founders that are true small business advocates. By and large, I’m sure there’s always bad apples. I’m the most optimistic I’ve ever been for the future of small business in the U.S. and not just because of the financing part, but because you when I bought my hotel, you couldn’t book a room online anywhere, right? Like just think of something that simple. And now I wouldn’t be surprised if, you know, that’s a data point that could somehow get used to make a financing decision. And so, so that’s why I’m optimistic is the digitization of everything in small business means I really think we’re at the tip of the spear on embedded financing and the clever ways that lenders are going to figure out how to provide capital to small business owners, but that this is going be a very friendly generation of lenders that understands. We gotta do this in a way so you’re more profitable, so you expand your business, because we as a lender, we win long-term only if you’re healthy. We don’t win if you go to the graveyard.

PR: Right, right. think that’s the key to it. Because a lot of these, like the embedded lending places that you just mentioned, I think they know their customers so much better because they focus on one particular vertical and it’s something that a bank would find very, very difficult. But anyway, maybe Jerry, I’ll give you the last word here. So what’s the one thing that gives you the most optimism about where this industry is heading?

GD: Well, I’m optimistic because small business owners are optimistic. mean, it is really, really rough to run a small business and survey after survey, the business owners will say, I’m optimistic. know, tariffs have been the big issue this year and it’s been up and down for business owners, but they’re still just moving forward and finding ways, you know, to work around ⁓ the uncertainty that’s going on. So, if I’m ever thinking, well, this is really tough, can we do this? You just have to look at our customers and say, yes, we can.

PR: Right, right. And think that’s one of the things I’ve been a small business owner my entire career since I was 22 years old. And I have got to tell you, I mean, I love small business. I feel like it’s so important. It’s an important driver for the economy. And I applaud the work you’re doing at Nav. I think it’s really important that the small business owner has not just access to credit, but better understanding of why they’re getting turned down or how they can improve their financial situation so they can get cheaper capital. it’s just better to them to run their business, to understand the finances of their business so much more. So important work you guys are doing. I really would like to thank you both for coming on the show today. What a fascinating conversation. Thank you, Levi. Thank you, Gerri.

GD: Thank you.

LK: Thank you. Super grateful you had us on.

PR: I want to focus on one thing that Levi said that I think is so important for everyone in small business credit to understand. Speed and ease of access trumps cost of capital for most small business financing needs. It is not that cost is unimportant, but that small business owners are busy and they want an easy button when it comes to financing their business. That is why I love the embedded lending example with Fundbox so much. When you have all the data, on the small business, you can get their application approved in one simple flow without having to go through a time-consuming back and forth. This is the bottom line for all these fancy AI models and API connectivity. Let’s make it easy for the borrower.

Anyway, on that note, I will sign off. Thank you so much to Nav for sponsoring this discussion, and thank you for listening all the way to the end. We’ll be back again next week with a regular episode of Fintech One-on-One.