Fixing Small Business Lending with AI with Lukas Haffer

Russ Fordyce 🏆 (00:00.893) Welcome back to the Winter Circle, everybody. I am here with Lucas. Now this is a topic dear to my heart of lending for small businesses. It's a pain in the neck and Casca is here to change it. Thank you, Lucas, for doing this for all of us. Welcome to the Winter Circle and congratulations on the Big Innovation Award. Lukas Haffer (00:10.318) Yes. Lukas Haffer (00:19.81) Thanks, Russ. I'm honored and I'm happy that my team's efforts are being recognized. It's a topic near and dear to our hearts, Russ Fordyce 🏆 (00:27.59) Absolutely. Yeah, now you guys are solving some interesting problems and I don't want to dig into the details. Who better than the CEO and founder to tell us all about the company? So give us a little background on the company and kind of what you guys are attacking. Lukas Haffer (00:42.892) Yeah, Casca helps banks originate loans to small businesses faster, which means we're deeply mission driven to help provide funding to the roughly 30 million small businesses in America that employ the vast majority of the American workforce. They are the economic engine of this country. They are the American dream for individual entrepreneurs. They are what put food on the table of families. that work at small businesses, they would contribute to the communities. for us, this journey started a little over two years ago with the realization that for small businesses, the number one problem right now is access to affordable funding. If you ask a small business owner where their problems sit, it's access to capital. And unlike Silicon Valley startups that might go to venture capitalists for funding for most small businesses their funding source is a loan and if you as a small business right now are going out to Get a loan you have two bad options You either go to a bank which would offer you the lowest interest rates the most affordable terms But it would just take forever because the banks are sitting on old technology and they're everything by hand. You are manually writing back and forth emails non-stop. Anyone who has ever applied for a small business loan or for a mortgage knows what that process is like. You're just constantly waiting for that next message that has another five documents that you need to produce in it. And so lots of small business owners give up on that path. They go for two or three weeks trying and eventually the first bank says no and they're too tired to go through another process with another bank. so lots of folks then fall prey to predatory online vendors who with beautiful marketing websites that promise you the world and promise you quick funding in 24 hours or less. Magic, right? They will promise you the world and then you have a rude awakening when you Russ Fordyce 🏆 (02:54.568) Magic. Lukas Haffer (03:01.102) now you're 25, 35, 45 % APR. I now regularly see small businesses that have these short-term high interest rate online loans on their balance sheet that clock in at APRs above 100 % and it's brutal. And I don't know about you, but man, I hate it. I think it's unethical, it's immoral, it is preying on the people who are actually trying to do something good for their communities. So I can't change the fact that these online lenders are charging high interest rates. I can't change the fact because they have high costs of capital. But on the other side, what I can change is the fact that the banks of America, the community banks that have the low cost of capital and could offer the interest rates that small business owners want, that they have all technology. I can build better technology. And so that's what my team does. Russ Fordyce 🏆 (03:53.822) Well, and it's such a strategic advantage now that technology, I don't know how the banks would ever keep up. You have to go to vendors like you and other companies to keep up with the amount of development that's being done in banking. Lukas Haffer (04:03.97) I mean, are some really, really large banks who like JP Morgan Chase, Wells Fargo, et cetera, have enormous IT budgets of more than $10 billion. Like those folks have tens of thousands of engineers. But if you're, I think at least they have the ability to build these things. But even for them, it might just not be. Russ Fordyce 🏆 (04:22.547) They're all good. Lukas Haffer (04:31.64) worth it to build something that really is the same for everyone. Maybe they should focus on building the things that differentiate them. But certainly for all of the community and regional banks in America, they are looking for a team of experts that do this and nothing else, that focus their entire mind space and all their heart and passion on building better small business lending software. because the outcome of that is a great experience for their employees and a great experience for their customers. Russ Fordyce 🏆 (05:05.225) And you've hit on something too. You said it earlier and I think people, I forget it, even as a marketer I forget it, which is we always think, at least I do, I think about America as these big giant companies employing all of us. That's all we hear about. You turn on the news and it's about Google and Amazon and they're laying off this many. And it really is upside down. They generate a lot of the wealth in America. Lukas Haffer (05:21.134) Yeah. Yeah. Russ Fordyce 🏆 (05:28.861) But they don't employ, they employ a lot of people, but as a percentage of people, it's not a huge amount. It's very much a triangle, you know, a pyramid where at the top you have those big companies and they employ some million people. But it is the very small bottom businesses with probably, you know, one to 10 employees that probably employ 70 % of America. And those are the people that are really struggling to get loans. As you mentioned, you know, we were talking before we started recording. Lukas Haffer (05:44.44) Yeah. Lukas Haffer (05:50.476) Yeah, yeah, that's it. Russ Fordyce 🏆 (05:58.748) about my own experience of buying a couple homes with small business finances, it is a pain in the neck. It is a total pain in the neck. Lukas Haffer (06:05.518) Yeah, it is. is because for the banks, focusing on the large companies and lending to large companies is just as much effort as the small business loan, but it's a much larger amount of capital that goes out the door that produces interest income. So in order to make small business lending, more attractive, you need to make it more automated so that instead of it taking 90 days and 15 different people being involved in originating one small business loan, you need to make it just a couple of minutes for a couple of people to look over and validate that everything is going the right way, which makes it way more attractive for the bank to do way more small business lending because the demand is out there. 30 million small businesses, you're right, they employ more than 60 % of the American workforce. yeah, you are damn close. And they do produce a large proportion of the US GDP and they could do so much more. I believe in small business America growing further and further. Russ Fordyce 🏆 (07:08.81) I was close. Russ Fordyce 🏆 (07:22.813) Yeah, you have a personal story that kind of brought you into this business. Kind of your family was operating a small business. Tell us a little bit about kind of how this ties back to your family ties. Lukas Haffer (07:35.468) Yeah, I grew up in a small town in Germany. I assume that's not surprising at this point anymore. I'm not trying to hide my accent. And I'm happy to tell you the story of the small town. So imagine beautiful historical buildings and a ton of engineers. It's Germany after all, Russ Fordyce 🏆 (07:59.018) That's all of Germany, small towns and engineers and Porsches. Lukas Haffer (08:01.952) Almost all of the folks in my hometown worked at some sort of small business, some hidden champion that makes machines that make machines that make screws for some automotive factory, right? And lots of scientists, lots of engineers. So were my parents. My parents both hold a PhD in chemistry. For them, science is their noble cause, their way of contributing to the world around them. And my dad worked in a small business when in 2008, the global financial crisis hit and we almost lost our home. I remember my parents sitting us down at the kitchen table telling us that... we'll all have to make some sacrifices to keep the lights on. And my dad attributed the state of the world to some bad businessman on Wall Street gambling with the world economy with no regard for others. And 12 year old Lucas, maybe in a naive way thought to himself, if some bad businessman on the other side of the planet can have such a big bad impact that a 12 year old kid on the other side of the world is having this conversation right now, maybe then some good businessman can have a big positive impact on the world. despite my parents thinking that I might go to university becoming an engineer and my mom's plea to study physics, I went to university studying business instead. And that's where I learned about the concept of the honorable businessman, the ethos of the entrepreneur. And today that is what is at the heart of Casca, the ethos of the honorable businessman and thinking about the small businesses that employed everyone in my hometown, including my dad and the impact that we have. Lukas Haffer (10:23.31) through the decisions that we make in financial services on the composition of the economy around us. Russ Fordyce 🏆 (10:32.521) And you guys have already had some early successes. Walk us through maybe some of your early customers and kind of, how did you win them over and what are some of those initial results looking like? Lukas Haffer (10:39.949) Yeah. Lukas Haffer (10:46.062) Yeah, the start has been amazing. We started a little over two years ago. And our first customer was a tiny community bank out of Connecticut, roughly 100, 150 employees that wanted to start a nationwide small business lending program. And they wanted to start with lending to the businesses in their community. laundromats and the bakeries and the corner shops. And they knew because they didn't have that many employees that they would have to do it in somewhat of an automated way. weren't that many people that could do the whole spiel of everything is on paper and emails and doing it all manually. So what we initially did for them is we created a beautiful online application, which believe it or not, most banks still don't have a way. to apply online through a simple online form. So we created a beautiful online application that people could go through. And we created a set of helpful follow-up messages where we were using AI in order to answer people's questions that they might have. So imagine a small business owner going through this form, and then the form asks them for their EIN, their employer identification number. Turns out lots of small business owners don't know that EIN by heart. Not surprising, right? So that used to cause a lot of churn. People would just give up in that moment, say, I don't have it. They started the application on their phone while they were on the subway. And they said, I'll come back to this later, which they almost never do unless you stay top of inbox, top of mind. And so instead, we would follow up and we would go, hey, Russ, I saw that you started. An online application for $150,000 working capital loan for your business would love to learn a little bit more about your company. I also saw that you were struggling to fill out the section about your EIN. You can usually find your EIN on a letter that the IRS sent you when you incorporated your business on your most recent business tax return. Let me know if there's anything else I can help you with. Otherwise, here's a link to jump back into the application and pick up right where you left off. And turns out, people responded. Lukas Haffer (13:09.998) people jump back into the application and conversion rates within weeks went from less than 10 % to more than 80 % of people submitting full loan applications because it turns out if you make it really easy for people to apply for a loan and they want to apply for a loan, they will apply for a loan. And so that... Russ Fordyce 🏆 (13:29.895) Well, just the concept of saving it is not having to sit down in one session to do it is huge. Lukas Haffer (13:36.142) Oh, right. Yeah. The fact that that is a thing that you appreciate, actually frustrates me so much more because it's 2026 guys. Like saving information should not be the magic that we're seeking. It should be a baseline expectation, but you're totally right. And so what we gave them was a beautiful online portal where you would see your progress and you can log out and log back in whenever you have time. sit down, do a couple of the kind of tasks that the bank needs you to complete, give them the information that they need to make a full underwriting decision. And at some point, receive your commitment letter and your approval right within that portal. No need to like keep emailing anyone. You can see your progress. You can see estimates of when you'll get a response from the bank, because that's really what small business owners care about. is like, am I approved and when do I get my money? Russ Fordyce 🏆 (14:30.729) right? They clearly don't care about interest rate if they're paying over 100%. And it's shocking to me because that example you provided is, in my world, it's the baker's oven going off and blowing up or going bad. And that's an entire business that Lukas Haffer (14:37.282) They Lukas Haffer (14:50.444) Yeah, that's exactly that. Russ Fordyce 🏆 (14:55.687) just needs an easy loan and now they're stuck with a hundred percent interest because they had to get it quick because they needed it overnight. Lukas Haffer (15:01.134) You're totally right. It is the baker's oven blowing up and the baker realizes I need $25,000, $30,000 to repair or replace the oven. Otherwise, I'm not opening the shop on Monday. And if I'm not opening the shop on Monday, and it would now take me 90 days to get the funding to replace it, then I might never open again. And that's a whole American dream. Russ Fordyce 🏆 (15:16.701) Yeah, or ever again. Lukas Haffer (15:30.902) a whole set of people that I'm blocked by that business that are going to have very difficult conversations at the kitchen table. Yeah. Russ Fordyce 🏆 (15:40.254) So talk us through, I know that, so now you've got this application and just getting the right data is hard and getting it clean is even harder as somebody that manages online forms for a living. I can understand some of your challenges. And then you go into this very formal banking underwriting process that's really the kind of the bottleneck of the thing. Lukas Haffer (15:47.778) You're right. Lukas Haffer (15:51.576) Right. Lukas Haffer (15:58.924) Right. Russ Fordyce 🏆 (16:09.577) It's literally a human with a printed notebook of pages reviewing whatever I sent them, which I sent them everything I had because I didn't want to look through it. That's the reality of it. So how did you attack that problem? How did you shorten that cycle? Lukas Haffer (16:15.598) and a lot of Excel sheets. Lukas Haffer (16:31.308) Yeah, the first couple of months of our company's focus was on that customer experience to make it really easy for the small business owner to submit everything they have. Kind of like you said. And then once we succeeded at that, we realized that we were causing a bottleneck on the other side. Now I had loan officers, underwriters, credit officers telling me, Lucas, I used to look at like four deals a week. I right now have more than 80 in my backlog sitting there waiting for me. Right. And So we swapped our focus to automate all of the tedious manual steps that the banker takes on the other side. So every document that you upload, we read through and classify, oh, this is a business tax return for 2022 for your business. Let's read through it and extract information like the revenue, the net income, any things that could be added back into it that were like. additional owners compensation dividends that you paid out that overall show the ability of your business to pay back any of the debt, right? Because that's the question that the bank is answering is trying to answer. is can Russ's business afford the payments on the loan because they have no interest either in you taking out a loan that you won't be able to pay back, right? So that's the information we get from those kinds of tax returns and tax returns are relatively easy because they are at least somewhat structured. They look more or less the same every year. They are slight changes. They look more or less the same for every business. There are slight changes depending on what kind of business you're running, what type of business you have, whether that's an LLC or a C-Corp or whether you're running it as a sole proprietorship. But our system reads through these documents differently. Things that are a little bit harder is like your management prepared P &L that you might get out of your QuickBooks accounting system with an expert or you might have written them in a Word document, on how you or your own Excel sheet, right? Depends on how you or your accountant prepares it. Those are not really structured. They always look different and they might be different based on the business. The bakery might list out what costs they have for all of their different ingredients, or they might just sum it all up under costs of goods sold. Russ Fordyce 🏆 (18:32.038) or Excel sheet. Lukas Haffer (18:52.258) There's a lot of interpretation in there. And so we have a team of machine learning engineers that specialize in sorting through these things correctly so that we can automate the process of preparing the materials for the underwriter. The underwriter is still the one looking through it. And there's still a human making the decision. We really care about this being a process where technology accelerates the human but does not replace the human. We want the eyes of the expert on the decision because we believe using AI responsibly in financial services means that it is fully human in the loop, explainable and auditable so that we don't have a risk of there being any injustice by the system, but rather having just humans accelerated in their decision making. And there are many, many more small things that are way less interesting that we do in order to automate manual steps like. automatically pulling a report from the Secretary of State to make sure that your business is in good standing, which secret tip for all small business owners before you apply for a loan, go to the Secretary of State website of your state and check whether your business is in good standing, whether you have filed your annual filings with them, whether you've paid your annual fees, because if you haven't and the bank is not using our software. You might just straight up get rejected and never find out why. If they are using our software, we'll at least notify you and give you a chance to quickly pay the $65 fee and get back into outstanding. But it's risky. Russ Fordyce 🏆 (20:24.701) There's always a $65 fee from the state. It seems like, yeah, it's your annual fee that you have to pay four times a year, I think. Lukas Haffer (20:27.542) That's always a fixie. Lukas Haffer (20:33.87) I think that's how it works, yes. Russ Fordyce 🏆 (20:36.649) So that 60 to 90 days that it usually takes that baker to get that loan, you've now shortened it by how much? What are your customers experiencing now? How are they able to process? Lukas Haffer (20:47.886) Yeah, we're now seeing some of these loans, depending on the size, fund in less than three weeks. So that's from three months to three weeks. And our goal is to go to three days because at three days, we're just as fast as the online loans, just that the interest rates are a fraction. The monthly payments are often an order of magnitude lower, which means sometimes people would be paying $20,000 a month. for one of these merchant cash advances and instead through one of the government guaranteed SBA loans, the small business loans that are guaranteed by the Small Business Administration, you end up paying $2,000 a month over the course of 10 years with interest rates as low as 9 % versus the 25%, 35 % APR that you see in other places. Russ Fordyce 🏆 (21:40.357) And I think you guys are tackling this the right way is you're not going out trying to be the loan agent. We've got lots of people out there that are loan agents and have plenty of capital and are deployed locally. We have lots of community banks in this country. And you guys are... Lukas Haffer (21:55.606) Right. And there's no need of, there's no lack of banks. There's lot of good technology for the banks to empower the good people that work at a community bank that want to help their community, that know their community way better than I ever could. They live there. They know the real estate. They know the businesses. They know where the money is well invested. They just need better technology. Russ Fordyce 🏆 (22:00.936) Right. Russ Fordyce 🏆 (22:21.105) And so what convinced you that that was the angle that you were going to go after these SBA lenders, these small business administration lenders? You've already partnered with a couple of the big ones. Lukas Haffer (22:31.894) Yeah, we currently partner with both of the top two largest ones in the country. Lifehawk Bank is the largest SBA lender by dollar amount funded for SBA loans and Huntington Bank is the largest lender by number of loans funded. They are also one of the 10 largest banks in the country and they both have been amazing partners to us as a business. They're also both investors in our business. which shows the incredible belief. And what convinced me to take this angle is the deep mission focus. For me, business is about making an impact on the world around me and hearing the stories of small business owners that we regularly invite to speak in our team meetings to tell the engineers what the impact is they have on the world around them. It moves me to tears. It is truly inspirational to see how folks that have been working on their companies for a decade that employ hundreds of people and sometimes stand in front of financial, personal and business ruin based on the high interest rates that these online loans charge. can transform their business and get back on their feet and get back on the train of growth and cash flow positivity when they refinance these high interest rates loans with a bank loan or when they take out a bank loan in the first place. It is amazing to see and that is what moved us. Russ Fordyce 🏆 (24:09.865) How fast are these banks able to adopt your software and get going, moving? Lukas Haffer (24:16.3) Yeah, it depends. Like some of them can be online in a matter of weeks. Some of the larger ones for them, it is a massive project. They have tens of thousands of employees that need to be trained on the new software. The good news is our software is really easy to use because it's modern software. It really shouldn't require all that much explanation and training. But in a large organization, in a highly regulated sector, you oftentimes still have processes that need to be adapted and signed off by compliance and auditors. We're not new to this industry, we've been doing this for a long time. So we know that sometimes it takes a little bit longer. right now we are in multiple projects getting our software stood up with some of the largest small business lenders in the country and I'm incredibly excited for it. Russ Fordyce 🏆 (25:06.185) Yeah, you guys have taken that kind of AI first model of kind of bringing that content into AI and letting AI help you do those tasks. And I always tell people, you know, it's the tasks, task work that AI is really great at, right? That's the stuff that's going to go is are these tasks, because it can go do tasks just like anybody else can. Where do you see those gains coming from? And how do you see AI kind of evolving into your business and helping you get to that three day window? Lukas Haffer (25:25.847) Right. Lukas Haffer (25:36.014) Yeah, there are two parts to this. One, we are a software company and AI helps us build software faster. It helps us build higher quality software and review the software. we internally are using AI for a lot of things to solve problems for our customers. The second part is as part of our software, which is built in an AI native way, our software is built to be used by AI to do those tasks. And for us, what that means is as AI gets more and more capable, the number of tasks that it can automate or at least significantly accelerate expands. In the beginning, when we were analyzing tax returns, there was still an error rate. Now the error rate is quickly plummeting, and we now see it really become extremely competent at analyzing the financials of a business. There are still things where if you have an AI help draft a follow-up email to a customer to respond to some of their more nuanced questions. You might still get errors, but over time as you see AI getting better, those errors quickly go away. And you can even imagine a future where you give them just an assistant that is an AI assistant that helps coach them through the entire process with customers being fully aware and located that they are talking to an AI. That's not what we do today because I believe right now, if you're asking a question to your bank, you expect a banker. to be involved in answering your question, even though I'm starting to see that in other industries, now folks are oftentimes interacting with customer support and they are interacting purely with AI agents. Russ Fordyce 🏆 (27:11.549) Yeah, it's admitted my personal banking already and it's a big bank that's spent a lot of money on it, on building out that capability. And it does work, it works pretty well, but it's helping me navigate my user interface mainly. How do I do this versus that? Yeah, it's very good at it. It's helped me a bunch of times. Lukas Haffer (27:19.746) Right. Right. Lukas Haffer (27:27.618) Yes. There's like little helpful links. Russ Fordyce 🏆 (27:37.372) When you're talking to these smaller banks though, the big banks get it. They've got UX experts, they've got teams of people, Q &Aing the tools. It's a software organization that they have. It would rival any software development house. I've been in those organizations as well. Lukas Haffer (27:49.568) Right. Lukas Haffer (27:53.581) I'm sure. Russ Fordyce 🏆 (27:56.398) These smaller banks have larger problems just because of their scale. If you could give every kind of modern bank exec, community bank exec, one piece of advice to kind of modernize their lending operations without buying your service, where do you think they need the most help? Lukas Haffer (28:16.098) I think the customer experience is something that in small business specifically is lacking for almost all banks that I interact with. is because when folks started investing in the customer experience, they started with the personal consumer banking experience and they made auto lending easier, for example, but they didn't make it to small business lending. Small business lending has just kind of been the orphan child that everyone just kept because it was so paper based and based on unstructured data just kept manual because they didn't know how to automate it. And what that led to is just a miserably manual experience for folks that are starting the application, which just leads to a lot of churn. And it's a lot of business that the banks could be doing that they are missing out on. is a lot of revenue growth for the banks as well. Russ Fordyce 🏆 (29:14.375) Well, Lucas, this has been phenomenal. I hope you're taking over the world of small business lending soon. And then I would like you to tackle every doctor's office in the world as well, because I'm sick of filling out forms there. And it's the same forms every time. And I have to put up my address 19 times when I go to a new doctor. So it is amazing that these systems exist out there still. Lukas Haffer (29:21.718) You're the one who might have software for it. Lukas Haffer (29:29.762) you Russ Fordyce 🏆 (29:39.623) These are the institutions that are the pillars of society, right? Hospitals and banks. they are, the smaller ones are so far behind and I'm glad there's guys like you out there kind of tackling these problems. And congratulations again on the win. And all the funding. Lukas Haffer (29:44.845) Right. Lukas Haffer (29:54.488) Appreciate it. Appreciate it. Thanks, Ross, and thanks for the conversation.