How Are Small Businesses Using Embedded Finance?

How Are Small Businesses Using Embedded Finance?

As a small business, finding the right financial support can be difficult and time-consuming. From applying for loans to finding the right type of credit, navigating the financial landscape can be both challenging and confusing for many entrepreneurs. Luckily, embedded finance is making it easier than ever for small businesses to get the support they need.

In recent years, we’ve seen a significant increase in Banking-as-a-Service (BaaS) offerings that enable fintechs to make financial services more accessible to their end-users. BaaS platforms operate like API-first wholesale banks. They offer a wide range of financial services, like cash management, debit cards, and credit lines that can be integrated into SaaS products. This makes it possible for software platforms to offer new and innovative embedded financial service experiences.

By partnering with technology providers that offer embedded finance, small businesses can improve critical financial metrics, access debt more easily, and can streamline key finance operations like payroll and vendor payments.

Here are four ways SMBs are utilising embedded finance to help them grow:

Embedded Lending

Innovative technology providers are utilising their customers’ sales data to assess their ability to pay back a loan. This data is a better predictor of creditworthiness than traditional measures. It is also on hand, so it enables embedded lenders to bypass traditional, time consuming, data collection processes. Platforms pre-qualify borrowers, offer efficient loans when they are most useful, and fund in real time. This is helping to make financing more accessible for entrepreneurs, giving them the capital they need to meet payroll, replace equipment, or launch a pop-up shop.

Let’s say you’re a restaurant owner and you need to invest in new kitchen equipment or replace something that broke during last night’s service. Rather than waiting weeks or months for the bank to process a loan, you can use embedded lending services offered by your existing technology providers and get the funds you need right away.

Embedded Payroll

Another great use case is embedded payroll. Payroll can be a major burden for SMBs, with complex tax regulations and compliance requirements making it difficult to get salaries processed on time.

By utilising platforms with embedded payroll, business owners can stop stressing about their bank’s weekly or monthly payroll cutoff. Platform driven events like clocking in and out and metadata like time of day, day of the week, and location, can automatically create a payroll file that can be reviewed, approved, and processed on time.

Recurring payroll data, just like sales data, can also be used to offer employees early wage access.

Embedded Accounts Payable

One of the biggest challenges for SMBs is managing cash flow, especially when businesses are operating on thin margins. Embedded AP enables purchase orders to be raised automatically when stock is low and enables vendor payments to be scheduled automatically when orders are received.

Business owners can skip the whole three-way match process because they can delegate payment authority to the receiver and put the PO and payment button in their hands (with limits & escalation workflow, of course).

This not only saves business owners time but also helps to improve supplier relations. When suppliers are paid on time and in full, they are more likely to offer discounts or extended terms in the future.

Embedded Insurance

Another way small businesses are using embedded finance is by offering insurance products to their customers. This can be a great way to diversify your product offerings, generate new revenue streams and also reduce risk.

For example, let’s say you run a small e-commerce business. You can find technology platforms that have pre-negotiated insurance plans for the kinds of products you sell and offer those plans at checkout. If a customer’s order is lost or damaged in transit, they can file a claim and get reimbursed for the cost of the order

Not only is the insurance purchase a revenue stream, the disputes process is outsourced when the insured event occurs.

Final Thoughts

Embedded finance is quickly becoming an essential tool for small businesses, enabling them with access to faster, more timely, tailored financial products. These platforms close the resource gap between SMBs and Corporates, helping entrepreneurs weather hard times more confidently and invest in growth more opportunistically.

As Embedded Finance successes chart the course, four key trends are likely to shape the future of banking for SMBs:

  1. Business management platforms like Point of Sale, Accounting and CRM will partner with BaaS to launch faster, more diverse, more scalable financial services.
  • Neo-banks will acquire and build their own business management tools to make their Digital Business Banking offerings more attractive.
  • Traditional banks will begin to embrace a role as a wholesaler, grow their R&D budgets, and build out APIs & SDKs to better compete with Banking-as-a-Service disruptors.
  • Blockchain-based Decentralised Financial Services (DeFi) offerings will emerge that are targeted at B2B use cases.

The good news for small businesses is that all of these trends should result in more diverse, seamlessly integrated, faster and cheaper financial services to choose from.