How Embedded Finance Supports the SME Economy | The Financial Technologist

The importance of small and medium sized enterprises (SMEs) is no secret. With the 400 million SMEs around the world representing around 95% of all business and accounting for up to 70% of worldwide employment, it’s not hard to see why they’re often referred to as the backbone of the economy. Why then, is it so tough out there for small businesses? It can be difficult to negotiate optimal payment terms with suppliers and secure financial support from incumbent banks. This leads to persistent cash flow issues that eventually result in 20% of SMEs failing within their first year of existence. In recent years, providers of embedded financial services have risen to these challenges faced by SMEs in order to help them thrive and grow. Embedded payments, insurance and lending services address the needs and challenges of small businesses by making financial products and solutions easier to use and more accessible than they have been in years gone by. In this article, I’ll explore how embedded finance supports the SME economy from the perspective of buyers and sellers alike. Let’s dive right in. Access to Financial Services Due to their size, limited credit history and lack of collateral, SME buyers often face difficulty in accessing traditional financial services. Embedded finance brings financial services directly to these small businesses, eliminating barriers to entry and providing them with access to working capital, loans, credit facilities and other financial products tailored to their needs. Greater financial inclusion improves liquidity, enables growth and supports day-to-day operations for small businesses. Reduced Cost of Reaching SME Buyers When it comes to the SME market, one of the key challenges faced by incumbent financial services providers is that it isn’t cost effective for them to market to SMEs and then underwrite them. In a world enabled by embedded technology, the cost of reaching and distributing financial services to SME business buyers is much lower. Simplified Payment Processes Embedded finance simplifies payment processes for SMEs by integrating payment solutions into existing checkouts. This enables sellers to accept various payment methods, automate invoicing, streamline collections and improve cash flow management. By reducing administrative burdens and providing efficient payment solutions, embedded finance supports SMEs in managing their finances more effectively. Meanwhile, buyers benefit from a streamlined purchasing experience and the option to add financial services at the point of need. Risk Mitigation SME buyers often face higher risks and uncertainties than larger businesses, making it challenging for them to obtain credit or manage financial risks. Embedded finance platforms leverage data analytics, machine learning and alternative data sources to more accurately assess the creditworthiness of small business customers and give them access to the credit they deserve. This helps mitigate risks, making it easier for SMEs to access credit, secure financing and meet their financial obligations. For sellers, the ability to offer financial services like trade credit to a wider pool of buyers empowers them to drive higher satisfaction and forge long-lasting customer loyalty. Financial Management and Insights Embedded accounting and financial reporting tools provide buyers and sellers with advanced insights. These tools integrate accounting, cash flow management and reporting functionalities, allowing SMEs to monitor their financial health, track expenses, generate financial reports and make data-driven decisions that ultimately help them to survive. Access to real-time financial insights helps SMEs identify areas for improvement, optimise operations and plan for future growth. Integration of Value-Added Services Embedded finance enables SMEs to access a range of value-added services that enhance their operations. For example, they can integrate payroll management, expense tracking or inventory management services into their existing systems. These services improve efficiency and reduce manual tasks so business owners are free to focus on achieving growth goals. Innovation and Partnerships Embedded finance fosters innovation by creating opportunities for SME sellers to collaborate with FinTech companies, banks and other financial institutions. Through partnerships, SMEs can access innovative financial solutions, leverage technology and tap into financial expertise. Ultimately this promotes business growth, facilitates digital transformation and enhances competitiveness. Market Expansion Embedded finance enables SMEs to expand their market reach and embrace new opportunities. By integrating payment gateways, financing options or other tools into their online platforms or marketplaces, SMEs can offer a seamless buying experience to their customers. This helps SMEs enter new markets, whether that’s an untapped online buyer segment or a new geographic region. Overall, embedded finance supports SMEs by addressing their challenges, providing access to financial services, simplifying payments, mitigating risks, enhancing financial management, fostering innovation and enabling market expansion. It empowers these businesses to overcome financial barriers, thrive in a digital economy and unlock their full potential for growth and success. The way that small businesses interact and transact with each other is undergoing a massive change due to the opportunities and benefits presented by embedded financial services and solutions. In the coming months and years, embedded lending, insurance and payments will become increasingly prevalent among SMEs, while disruptive FinTech companies develop new and innovative embedded solutions in tax, accounting and other areas. It’s about time that the SMEs holding up our economy get a fair deal when it comes to financial access and ability. Read more articles like this in The Financial Technologist. Download your free copy here.