Embedded Lending: The Right Tool for Your SME to Grow
SMEs (Small and Medium-sized Enterprises) are a crucial part of the U.S. economy. Approximately 33.2 million small and medium-sized businesses operate in the U.S., representing 99.9% of all businesses. The number is increasing annually, as shown in the chart below. These businesses are vital to employment, since they employ approximately 60 million people, 46% of the U.S. workforce.
Despite that growth, owning an SME can be challenging, especially in terms of growth. Growing a company requires two things: A great growth strategy, and cash to implement it. As for merchants, the main challenge when creating a growth strategy is making your business scalable. Merchants tend to expand by adding more physical stores, but opening new stores demands large sums of money and increases operational fixed costs, since they must hire more staff, pay rent, and all the other expenses that come with it. Most of that money is spent prior to launch.
Therefore, when merchants consider expanding, the e-commerce model may fit better. E-commerce doesn´t require more physical stores to grow, only a strategically located warehouse and some solid digital channels to sell your products. That makes it more scalable and cost-efficient than physical stores. As a result, E-commerce has skyrocketed in the United States in the last few years, especially during the COVID crisis, when many stores were forced to close and consumers turned to online channels. The chart below shows industry growth and, while 2022 is not looking great, I am confident that once the U.S. materializes from the current crisis, those sales will rise again.
The scalability issue can be solved through online channels, especially now several companies offer online store opportunities such as Amazon, eBay, or Flipkart. You don´t even need a fancy website or pay a server since you can use the online space those companies provide. However, growing any business will always be challenging and requires money.
No business can grow without money, especially merchants. Let´s say you set up your online store on Amazon and suddenly receive hundreds of purchase orders. You need money to buy inventory faster, rent a larger warehouse, or pay employees to run business operations. The problem is, if you apply for a bank loan as a young company, you will lack credit history to achieve a good credit score, and likely be rejected, or forced to pay high-interest loan rates. A 2022 report by Zippia showed that only 51% of all loans requested by rural small businesses were approved, whereas urban businesses had an approval rate of a mere 38%. On average, therefore, the likelihood of receiving a loan is low.
That is where embedded lending comes in as a solution for rapidly growing companies requiring money for investment. Embedded Lending represents a more agile way for non-financial institutions to offer loans. By using embedded lending, you can access credit quicker and at a lower rate. This is because such non-financial institutions rely on your current data rather than the traditional credit score system.. Let´s say you open a store on Amazon, and start selling lots of products, providing you with growth opportunity but no money to invest. Since your sales are strong, Amazon will deduce that you are a low-risk borrower, and will confidently approve a loan on your performance and capacity to make repayments and not on your credit history.
SMEs are taking note of embedded finance, including embedded lending. A study by Accenture shows “if banks do nothing, new embedded finance offers could claim up to $32 billion of SME banking revenue by 2025.” The larger the company, the more interested they become in embedded finance. In fact, 47% of SMEs would be willing to pay more for embedded finance services compared to traditional banks, and 57% of medium companies alone.
That is why embedded lending is the ideal tool for growing your SME. If you are a smart merchant with a great product and solid sales, you are likely to receive better loan offers at lower rates in a faster and more agile way through embedded lending, allowing you to keep up with growth.
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