The financial space has a long history of exclusionism for small business owners. Slow processes, backwards-looking risk models and finance providers that don’t seem to truly understand the needs of twenty-first century businesses have all played a part in preventing an inclusive financial environment for SMEs.
But embedded financing is changing all of that, according to Mikkel Velin, co-CEO, YouLend. Through the use of alternative data sources that provide a more sophisticated assessment of SMEs, and quicker processes that allow merchants to complete applications within minutes and receive an offer immediately, more SMEs can access financing than ever before.
Embedded finance doesn‘t just help merchants: it helps tech companies, e-commerce platforms and payment service providers (PSPs) too, giving them an increasingly important competitive edge.
The biggest players have already caught on to this — eBay, Shopify, Google, Stripe and Square all offer financing products embedded into user experience.
There is, however, something standing in the way of SMEs getting access to truly competitive financing products.
Because of the wide range of region-specific regulations around financial offerings and discrepancy amongst providers, the largest SME providers are still struggling to expand their embedded finance offering.
Consistency across geographies and customers is non— negotiable for the likes of eBay, Shopify or Google. If they are to offers fair pricing and inclusive financing to their SMEs, they need the ability to do it everywhere they operate, with as little change to their merchant journey as possible.
This need for more consistent, scalable offerings across countries and industries will be driving the evolution of this market over the next few years, and therefore directly impacting how accessible financing is to SMEs everywhere.
How embedded finance impacts SMEs
There’s no doubt about it: the birth and proliferation of embedded finance has irreversibly changed the financing space.
Despite comprising a large proportion of the UK’s GDP, SMEs have historically been highly underserved by traditional banks.
The factors assessed by traditional financers’ risk models often ignore some of the best risk predictors in an increasingly digital world — such as revenue diversity and volatility of customers, or metrics on the perception of the SME from their customer base.
For example, new data shows that 16% of businesses are side-hustles, typically run by one person — which are highly unlikely to be eligible for funding or support within current, or traditional, qualifiers.
The technology difference
How is embedded finance shifting the financing paradigm for SMEs? It comes down, as always, to better technology.
By building robust, often real-time integrations between multiple sources, it is possible to combine public—facing data, credit risk information, and proprietary data points from embedders to generate deeper insights into the behaviour of the applicant.
The result? More inclusive, more competitive, and faster financing products that adapt to the needs of the modern SME. Below are examples of the results that YouLend has achieved so far with its partners.
9 out of 10 SME applicants get approved for funding
- 43% of merchants see speed as a priority factor when choosing a financing provider
- 25-36% additional growth registered by merchants who take embedded financing, compared to merchants who didn’t, 6 months past financing
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