How do small businesses use embedded finance?

Small and medium-sized businesses are lean and flexible operators that are disproportionately affected by a lack of access to affordable and timely financial services.

Although many financial institutions offer a wide range of services, including various accounts, cards, and loans, traditional providers have cumbersome onboarding processes. This leaves small businesses underserved because they haven’t been in business long enough to qualify, they don’t have months to wait for a bank approval, or they have to spend their working hours running their business rather than at a bank queuing branch.

Fortunately, fair, inclusive and accelerated financial services are now becoming readily available through a burgeoning industry called embedded finance.

What is embedded finance?

Embedded finance is the delivery of financial services through a partnership with a technology provider, rather than a bank or other traditional financial institution. Embedded financial partnerships are typically technology-driven and provide an end-to-end solution for small businesses, from application to payment.

Embedded Lending

Lending institutions are increasingly collaborating with software platforms to offer small business loans. These platforms use business data that enable modern underwriting models based on real-time sales rather than historical information.

Modern lenders can provide capital almost immediately to help SMEs payroll, replace a critical piece of equipment, or set up a pop-up project, rather than weeks or months later when the opportunity has passed or the damage has been done.

These financial products also help businesses avoid late payment fees, which are often attributed to fluctuations in cash flow, because the repayment is automatically deducted from credit card processing receivables.

Embedded Payroll

When employees need to be paid, small business owners face several challenges.

First, complying with tax and payroll regulations can be very complicated. Many national and sub-national governments have their own laws that determine when overtime is payable to an employee who works more than eight hours a day or 40 hours a week.

Businesses must comply with complex wage and hour laws that often result in extensive paperwork to be completed. A small business owner may need to track pay rates using accounting software or manually calculate rates for each employee in accordance with local law.

Embedded payroll platforms have automated this process, allowing small business owners to set a single pay rate and allowing their employees to clock themselves in and out using company hardware or even employee mobile apps.

The platform then determines which employee hours are eligible for pay multipliers (e.g. overtime, night shifts, part shifts, etc.) and routes a convenient approval request at the end of each pay period. Once approved, the platform initiates payment to the employee’s preferred account or wallet.

Embedded Liabilities

Small businesses operating on tight margins can risk supplier relationship issues, evictions, and even closures if they don’t manage cash flow. Using the best suppliers and paying the right amount at the right time with the right payment methods can mean thousands of dollars and hundreds of hours saved at the end of the year.

With embedded accounts payable, business owners no longer have to wait for suppliers to manually invoice or write and file checks with every transaction. Instead, orders can be placed automatically when inventory levels reach certain limits, invoices can be digitized and automatically routed for approval via mobile notification, and all parties receive instant notification once payment is made.

With all payables digitised, managed, approved and tracked on a single platform, business owners can stay on top of expenses and ensure they have the cash flow positive to run their businesses with no surprises.

Final Thoughts

While traditional banks still offer the widest range of financial products and services for SMEs, their product range is lacking in speed. Embedded services have emerged as a viable alternative as they enable small businesses to solve the problems they face today.

Three strategies are beginning to play out that will only accelerate this change:

  1. Some banks are embracing their role as wholesalers rather than retailers, and are working with FinTechs to embed funding into direct-to-consumer technology platforms
  2. Some banks are significantly increasing their R&D budgets, adopting agile product development methodologies and investing more in proprietary technologies
  3. Some FinTechs are becoming banks, either through acquisitions or through regulatory channels to obtain licenses

The net effect for small businesses should be faster, more widespread access to tailored financial services, giving them a level playing field with large companies.


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