Three Ways AI is Transforming Small Businesses

Small businesses employ nearly half the private sector workforce and generate trillions of dollars of economic activity. AI adoption and integration can help small businesses compete against larger firms by streamlining operations and reducing costs.

Entrepreneurs and small businesses are also harnessing AI to drive growth and gain competitive advantages. Through the integration of digital tools that implement AI technologies, ranging from generative AI-powered chatbots to machine learning commerce platforms, they are revolutionizing their operations.

BPC’s latest report highlights how small businesses are implementing AI-driven solutions for accounting, marketing, customer relations, and more. Over 80% of small business owners who use AI realized its value in their operations: improving systems, increasing efficiencies, focusing time, and producing valuable content. Still, only a narrow set of businesses today leverage AI. Lawmakers must ensure AI policy promotes inclusion and innovation so more small businesses can take advantage and move our economy forward.

Starting and Growing a Business

AI tools can help small businesses gain several advantages. Using AI-enabled tools, businesses can analyze market trends faster and at a larger scale to enhance decision making processes in early stages, concept testing phases, and foster valuable feedback loops. Similarly, machine learning algorithms can analyze increasing volumes of customer data, leading to improved products or services that may better attract customers or appeal to a broader customer base. These AI tools continuously evolve, leveraging the data they process to create an iterative cycle of improvements, thus enhancing customer offerings and experiences as more businesses adopt these tools.

Marketing strategies are another example of how AI can help across stages of the business life cycle:

• Initially, businesses can employ AI tools to create targeted campaigns, segmenting audiences, and predicting audience behavior to best understand how to grow their customer base.
• As small businesses grow, AI tools can offer cost-effective solutions that drive savings and improve profitability. AI tools can include things like chatbots, cloud services platforms, scheduling assistants, digital assistants, and typing/writing applications; more commonly for small businesses, this includes e-commerce platforms.
• Later in the business life cycle, AI can target market demographics and behaviors of a business’ current customer base. By doing this, businesses gain the ability to tailor their product design, refine brand messaging, and optimize market strategies.

AI can also help small businesses make more informed strategic decisions. Using AI-powered data analytics, businesses can extract deeper insights from larger datasets revealing patterns that may not be easily discernable using traditional methods. These insights are important for developing a strong business model and making key decisions related to pricing, product features, and customer service strategies.

While AI offers many opportunities for small business growth, it also introduces challenges. “Hallucinations,” where AI presents convincing, yet inaccurate information is one. Small business owners should integrate their own expertise, intuition, and insights when analyzing AI-derived outputs. Keeping up with the digital skills required to effectively use and manage AI technologies is also a challenge. Investments in AI literacy, upskilling, and reskilling can help.

Outlook: Embracing AI’s strategic advantages can better enable startups and small businesses to navigate market complexities and foster growth. Entrepreneurs should adapt to AI’s evolving landscape and keep an eye on potential risks. Protecting customer and proprietary information against data breaches and unethical use should be top of mind. The potential for biased algorithms also raises ethical issues, which can affect customer trust. Balancing automation with human intervention is crucial, as over-reliance on automation may undermine the personal touch, which is important for growth. The journey ahead involves coordinating AI’s benefits with oversight on security, bias, and risks. As small businesses navigate this, the focus will be on leveraging AI as a powerful tool, ensuring its integration fosters both innovation and trust.

Improving Business Operations

A Small Business Entrepreneurship Council (SBEC) survey found that AI tools saved small business owners 13 hours a week, with 67% of business owners saying AI helped their businesses acquire new customers, make sales, and grow revenue. Over time, there may be greater growth as organizations are interested in investing more in AI solutions. One area small business owners identify for improvement is the potential for AI-powered tools, particularly chatbots, to handle routine inquiries from customers or automate responses, freeing up time for them to handle tasks that require human creativity and critical thinking. They also recognize the potential for AI to streamline operations by automating data-heavy tasks like inventory management and accounting. The SBEC survey also revealed that “76% of small business owners report that AI is freeing both the business owner and their employees of time to focus on high-value tasks.”

In addition to automation, AI is already being used to improve workforce and budget management efficiencies. Small businesses have reported saving hours of manual review by implanting AI tools that can help to sort through job applications and highlight top candidates. Small businesses also take advantage of AI-enabled tools to enhance team performance, support a remote workforce, provide strategic insights about employee training and development, and support budget optimization to ensure spending is efficiently allocated, maximizing return on investment.

Outlook: Ethical AI use, safeguarding data privacy, and maintaining a balance between automated and human-driven processes are important in discussions about AI’s role in business. While AI can be leveraged for efficiency, a human must always be in the loop to manage issues that might arise from customer service interactions, biased decisions in recruitment, and business decisions that take social needs and concerns into account. 

Accessing Capital

Financial institutions are increasingly integrating AI and machine learning into lending decisions. A June 2023 survey found that 22% of lenders already embrace AI, though this trend is greater for larger lenders.

AI enables lenders to provide tailored lending solutions to small business owners who may face challenges accessing traditional financing because of the use of large alternative datasets. Lenders who employ AI can automate the underwriting process and process more data points; automation can decrease bias in the lending process by decreasing human input. This gives small business owners from underserved communities greater access to lending.

Despite AI’s potential in lending, its track record is mixed. Fintech lenders—those that incorporate technology into their automated lending processes—tend to charge higher interest rates and have lower borrower satisfaction. On average, fintech companies charge low-scoring borrowers an interest rate that is 3% higher than high-scoring borrowers. Twenty-five percent of small business owners were dissatisfied with their experience at an online lender, more than double the dissatisfaction rate with banks or credit unions.

Outlook: Combining human oversight with AI tools will likely yield the best results for small businesses. AI can help lenders leverage alternative data and provide more tailored loan options. The CFPB requires human involvement in lending decisions, so it is imperative that those working with AI understand how their systems made certain determinations and what the real consequences of these decisions are

Looking Ahead

As small businesses increasingly integrate AI into their operations and processes, the potential benefits grow exponentially. Nearly half (48%) of small businesses started using AI tools in the past year, and this number is expected to continue rising. As the focus shifts to embracing AI, it’s essential to prioritize the principles guiding its use.

New legislation and discussion around potential regulatory actions could either enhance or hinder the ability to adopt and use AI. Ensuring widespread distribution of the technology’s benefits and responsible use are essential for the betterment of small businesses – the ‘backbone’ of the economy.