Embedded finance: A finance revival for SMEs

By Ivo Gueorguiev, below, co-founder of e-money institution Paynetics

For several years, back-to-back crises have made growing and frankly, surviving as a business a challenge to say the least. Turbulence has been a constant, meaning SMEs have had to be agile and flexible to navigate unprecedented challenges.

The sophistication of technology and innovative software has helped SMEs streamline operations. However, one issue remains – access to financial services. External sources of finance are becoming less accessible and affordable for SMEs. As the hurdles get higher, alternative sources are in demand. That’s where embedded finance comes in.

Embedded finance, the seamless embedding of a financial product into a non-financial space, is gaining momentum, a staggering £230.48 billion windfall to be exact. However, this new route to market for financial products has been targeting consumers. With 5.6 million SMEs in the UK economy, the lack of digital banking and other financial services tailored to SMEs is a missed opportunity too big to ignore.

It’s time for SMEs to be at the centre of the revolution.

Fluctuating financial demands

The impact of SMEs on the UK economy cannot be overstated. Yet, they are overlooked by traditional financial institutions and face complex, time-consuming finance processes, high fees, and limited access to credit.

Traditionally, SMEs have struggled to access a wide range of financial services that meet their unique needs compared to larger businesses. Embedded finance is a game-changer for SMEs. It bridges the financial services gap by offering SMEs access to products and services directly within their existing business tools and platforms. Imagine a small retailer seamlessly processing payments, managing payroll, and applying for a business loan, all from a single platform. Merging services simplifies financial management, reduces costs, and enhances overall efficiency.

Furthermore, embedded finance solutions can be designed with the specific needs of SMEs in mind. They offer scalability, flexibility, and affordability – results which are critical for smaller businesses with fluctuating financial demands. Whether handling everyday transactions or planning for expansion, SMEs are empowered by these solutions to make informed financial decisions and grow with confidence.

Putting SMEs first 

SMEs have long fought against a lack of support from their banks, with (73%) saying they struggle to secure a meeting with their bank or financial manager, leading to delays in their business plans. Embedded finance can automate the routine steps when engaging with banks by integrating financial tools seamlessly into operations. For example, they can set up automated invoicing, track expenses, and reconcile accounts in real-time. These automation features save time and reduce the likelihood of costly human errors.

Moreover, embedded finance solutions provide SMEs access to sophisticated data analytics tools. SMEs can gain deeper insights into their financial performance, customer behaviour, and market forecasts. For instance, they can analyse sales trends, identify loyal customers, and optimise inventory management to respond more effectively to changing market conditions.

The power of personalisation

Embedded finance isn’t just about making existing financial services more accessible. Beyond the basics of payments and loans, embedded finance solutions can offer value-added services that transform how SMEs operate and compete.

One advantage is financial planning and forecasting. With 82% of SMEs saying the cost of living is negatively impacting them, embedded finance can help create a robust financial plan. With forecasting tools, SMEs create realistic budgets, set achievable financial goals, and track progress. This proactive approach to financial management empowers SMEs to make strategic decisions that align with their long-term vision.

Additionally, embedded finance solutions can offer personalised recommendations based on the financial data of SMEs. These recommendations can cover everything from cost-cutting strategies to investment opportunities. By leveraging these insights, SMEs can optimise their strategies and spot new growth opportunities.

Democratising access to finance

Access to capital has long been a major pain point for SMEs and impeded growth. Traditional lending institutions often demand extensive paperwork, collateral, and impeccable credit histories. This stringent approach has increased the cost of funding and historically excluded many SMEs from accessing the funds they need to succeed.

Embedded finance disrupts this status quo by providing alternative funding sources that are more accessible and flexible. SMEs can tap into a broader range of lenders, including peer-to-peer platforms and fintech companies with embedded finance solutions. These platforms leverage data-driven algorithms to assess creditworthiness, making borrowing decisions faster and more inclusive.

Additionally, embedded finance solutions can democratise and scale innovative lending models for SMEs, such as revenue-based and invoice financing. These models provide SMEs with options that align with their cash flow and revenue patterns. Revenue-based financing allows SMEs to repay loans based on a percentage of their monthly revenue, making it easier to manage repayments during periods of fluctuating income.

The future of finance

SMEs are the backbone of the UK economy. However, they are underserved when it comes to access to financial services. Innovation is more vital than ever, and embedded finance is the lifeline SMEs need to remove the constraints of traditional finance systems.

At its core, embedded finance is about democratisation. It ensures that SMEs, regardless of size, are free from the hassle of implementation and offers access to bespoke tools and services to tackle every fiscal challenge head-on. With automation saving time for resource-poor teams and sophisticated data capabilities offering insight into changing market conditions, embedded finance is a dynamic and exciting force transforming access to finance.

It’s time to level the playing field for SMEs and make 2024 the golden year for SMEs.