Live Oak Bank, a Wilmington, North Carolina bank that lends to small businesses, used to turn down requests for loans of less than $350,000, because of the time it took to underwrite them.
"We just didn't have the infrastructure," Neil Underwood, co-founder and board member of Live Oak Bank, told American Banker. "Very few banks are going to underwrite the $200,000 loan, and sadly, small businesses have to turn to merchant cash advances or use credit cards, which have way higher APRs."
In the fourth quarter, Live Oak plans to roll out Live Oak Express for SBA 7(a) loans below $350,000. According to Underwood, the bank can afford to do this because it will use software from Casca to automate much of the loan process using generative AI, making it possible to approve loans in a day or two at reduced expense.
"We can do what we love to do at Live Oak, which is put much-needed capital in the hands of small businesses, so they can buy the pizza oven, expand the operation, whatever they need to do," he said. Other community banks in Live Oak's network have also been talking to Casca to do the same, he said.
Most small business loans are small, Lukas Haffer, founder and CEO of Casca, told American Banker. "Most small businesses are looking for around $100,000 to finance expansion: buy a new truck, buy some inventory, buy some equipment, hire a couple of extra people to expand. And those small business loans, historically, were just as much effort as underwriting a larger commercial loan, maybe sometimes even more in interacting with customers over email, because those customers don't have a CFO, they might have an accountant that might be helpful in gathering some of the information, but it would be a lot more effort, often, to collect all the information that's necessary to make an underwriting decision from a small business."
On Tuesday, Casca announced a $29 million funding round led by Canapi Ventures. Live Oak Bank, the largest U.S. Small Business Administration SBA 7(a) lender by dollar volume; Huntington National Bank, the largest originator by volume of SBA 7(a) loans; and Bankwell Bank, Casca's first customer, all invested, as did Y Combinator, Peterson Ventures and Alliance Funding Group.
David O'Connell, founder of O'Connell Lending Insights, sees a growing trend in banks incorporating gen AI into the lending process.
"It started with financial statement spreading and has expanded to tasks such as crafting the written description of a borrower's financial results and changes to their credit worthiness," O'Connell told American Banker. "What's great is these lenders have gotten the hang of trusting AI to do the start — lenders are good story tellers but lousy writers — and then putting the human in the loop to finalize the narrative."
Some lenders are using AI to automate as much of the credit proposal fill-in-the-blank drudgery as possible, he said.
"In three to five years, business lending will be completely transformed by a combination of embedded finance and AI," O'Connell said. "For example, in commercial real estate, using embedded to access a borrower's rent-roll data within their ERP or accounting system, and then an AI performs a calculation of the borrowing base. The lenders who are getting the hang of things now will be the ones benefitting from that transition without it being too much of a transition, because they'll already have that new institutional muscle memory and resilience to this kind of change."
Huntington's plans for Casca
Huntington Bank in Columbus, Ohio, is planning to deploy Casca software next year. Like Live Oak, it plans to use it to help originate SBA 7(a) loans.
"There is no blueprint for being a small business owner," Christian Corts, regional banking director at Huntington National Bank, told American Banker. "So we are trying to create intuitive digital experiences for them that meet them where they are from an allocation of time perspective, and remove any information deficit between bank and customer. One of the great things about this technology is it can help them start the process. If they get to it at midnight, it can help answer some of those questions where there's lack of clarity, and then our team can pick it up in the morning."
Huntington will turn to the Casca software at different points in the loan process, depending on the customer and the starting point. For instance, a small business owner might start by going to a bank branch and getting a loan application, but not have time to fill out the whole application there and bring it home to finish later. If the borrower has a question about an item on the SBA loan application, they can ask Casca's chatbot at any time during the night. A banker will review the exchange in the morning.
"Our best SBA underwriters still spend time on administrative tasks," Corts said. "That is not the best use of their skill set, and so this will allow them to focus on the nuance of the deal versus retyping information into different systems."
The actual loan decision is still made using Huntington's existing underwriting models and human loan officers, Corts said.
"Casca allows us to remove some of the complexity of bouncing customers back and forth between multiple forms, so that origination feels intuitive and streamlined," Corts said. "They get their question answered whenever they need it."
What Casca's software does
Originally, Casca's software mostly helped facilitate interactions between banks and borrowers. At
This has increased conversion rates at Bankwell from below 10% to as high as 81%, according to Haffer.
Last year, Haffer realized that the new online loan application system was flooding underwriters and credit officers with loan files, creating a backlog for them to review. At one point, he did a ride-along with a loan officer who was meeting with several dental practices, and in between, "trying to write chicken scratch notes into his Apple Notes app."
Haffer saw an opportunity to automate that work. "What we built is the ability for the lenders, with the consent of the applicant, to just have call transcription in context of your loan origination system, so that if I say, 'I'll send you a follow up,' it immediately drafts up the follow-up for me, and it takes perfect notes, analyzes the sentiment, and if I am the underwriter that is being handed a file, I can see the entire history of everything that happened on the loan, including those four or five phone calls that the lender had."
Haffer estimates Casca automates 90% of the manual work underwriters used to have to do.
The software also helps lenders monitor payments and do annual and quarterly reviews, and adjust the risk rating after the loan has originated.
"If I'm doing that on a continuous basis, I can see the history of this relationship with this customer over the last couple of years, and I can see every interaction I had with the customer," Haffer said.
Casca plans to market its software broadly to community banks.
"When it comes to business lending, community banks have struggled," Haffer said. "It has been a heavily manual process on top of usually relatively old software, sometimes Microsoft Office suite with Excel sheets and lots of PDFs and Word documents. We now have the tools that we can give to them to lend way faster with way less manual effort, and maybe conquer back some of the market share that they are losing to predatory online lenders that are giving small businesses merchant cash advances at enormous interest rates."
Casca is also expanding into digital account opening software, loan servicing software and eventually a full modern, AI-native banking software stack, he said.
