Which trends are driving embedded lending solutions and why they’re winning over SMBs

Embedded payments are solidifying their place in B2C, and B2B companies are joining the trend to automate payroll, invoicing, and procurement workflows.

Embedded solutions are also taking off in the SMB lending space, as businesses move away from direct borrowing through traditional financial institutions toward more integrated solutions. 

37% of SMBs are interested in switching to providers that offer embedded lending options, according to a recent survey. This is the preferred choice for SMBs’ own needs and for those providing embedded lending to customers.

Anchit Singh, Chief Business Officer at Fundbox, believes this shift toward embedded lending solutions is because SMBs are served by a broader and more fragmented set of financial institutions, creating a “fatter tail” of providers compared to the consumer segment.

Fundbox helps SMBs manage their working capital by offering embedded lending and payment solutions that integrate directly into their financial workflows. The loans and lines of credit offered by Fundbox are originated by its banking partners First Electronic Bank and Lead Bank, subject to their respective credit and risk policies.

“Small businesses, like everyone else, have historically relied on their banks to meet their financial needs,” says Singh. “However, the landscape for SMBs differs significantly from that of consumers.”

What’s driving SMBs toward embedded lending solutions?

Singh shares 3 key reasons why SMBs increasingly turn to embedded finance solutions:

– Speed and Convenience: Traditional banks have lengthy loan approval processes, leaving SMBs waiting weeks to access funds. Embedded finance solutions, on the other hand, integrate directly into platforms SMBs already use, such as e-commerce or accounting software offering automated underwriting and near-instant access to capital. This enables SMBs to address challenges or seize new opportunities without delays.

– Flexibility: Embedded lending solutions can provide more adaptable options than traditional financial institutions. This flexibility includes not just repayment terms tailored to revenue patterns or cash flow realities but also the ability to borrow variable amounts, such as through a line of credit. 

“These solutions adapt to the unique and often fluctuating financial needs of small businesses, making them less rigid and more practical,” Singh notes.

– Access: Many SMBs lack the credit history or financial documentation that banks typically require, making traditional loans more difficult to obtain. Embedded finance providers leverage alternative data sources, such as payment and invoicing records, to create a more comprehensive view of a business’s financial health. This allows them to provide capital to businesses that might struggle to meet traditional lenders’ stricter credit criteria.

Addressing the gaps in embedded lending for B2B SMBs

For many SMBs, accounts receivables create obstacles by locking up capital. Since nearly two-thirds of SMBs operate as B2B businesses, invoice financing can be a potential solution to address their credit requirements, especially for businesses handling larger, infrequent transactions.

“Embedded lending today is largely dominated by Merchant Cash Advances [MCAs], popularized by players like Block,” notes Singh. “But this approach doesn’t effectively address the needs of B2B businesses.” 

In the same vein, Singh asserts that there is an opportunity to address the payable financing needs of SMBs. He suggests developing embedded payroll financing solutions or introducing more B2B BNPL options at checkout to make payable financing more mainstream and accessible.

The fragments market, however, still presents challenges.

To thrive as an embedded lending solution provider, a company needs to excel in both technology and striking the right balance between “fin” and “tech” to build a sustainable business capable of weathering credit cycles, according to Singh.

“Few players in the embedded lending space have experience navigating such cycles effectively,” he says. “With over a decade of expertise, Fundbox has gained invaluable insights from managing credit downturns during critical periods like the pandemic and the 2022 supply chain shock. These experiences have strengthened Fundbox’s ability to grow responsibly and adapt to macroeconomic headwinds.”

Fundbox’s approach to SMB working capital – Fundbox makes working capital solutions accessible to SMBs through 3 approaches:

1. Simplifying working capital with SMBs’ existing tools: Fundbox’s solutions are directly integrated into the platforms SMBs already use, such as accounting software and invoicing systems. This allows businesses to access capital smoothly within their existing workflows, eliminating the need for a separate, time-consuming loan application process. 

“Our use of platform data further streamlines and accelerates decision-making, enabling funding decisions in minutes,” says Singh.

2. Flexible repayment: Fundbox offers usage-based repayment options, which can be more manageable for SMBs than fixed repayment schedules in the case of traditional lenders.

“Our financial products are designed to adapt to the fluctuating cash flow of small businesses,” notes Singh.

3. Tapping into data: By leveraging advanced machine learning techniques and analyzing diverse data sources like bank accounts, payments, and invoicing, Fundbox creates a comprehensive view of a business’s financial health. This enables the firm to serve SMBs without requiring credit histories or strong personal credit scores.

Fundbox and Intuit share a longstanding partnership. Integrating Fundbox with QuickBooks helps tackle the challenge of invoice financing.

Here’s how it works: Fundbox’s integration bypasses the need for a traditional loan application, speeding up the disbursement process. With one click within QuickBooks, businesses can get short-term financing.

Instead of relying on personal credit scores, Fundbox uses fiscal data from QuickBooks. Businesses can also review the shared data upfront, helping them make quicker, more informed decisions.

Fundbox’s primary goal, according to Singh, isn’t to challenge banks but to bridge an over $5 trillion global small business funding gap.

Emerging trends in the embedded lending space 

Entering the new year, Singh envisions 2 pivotal trends emerging in the embedded lending sector:

i) The embedded lending space is set for significant growth and transformation over the next 2–3 years, fueled by adoption across various cash cycle use cases, including receivables, payables, and working capital. Products like payroll financing, invoice financing, and embedded lines of credit are expected to become more mainstream. 

Singh also anticipates the rise of vertical-specific embedded lending solutions catering to different industries, from retail to manufacturing. “This will lead to lending products that are intuitive and tailored to meet the unique needs of each industry,” he says.

ii) Another key trend on the horizon is greater collaboration among fintech providers offering complementary solutions. 

Embedded lending complements other financial services such as payments, payroll, insurance, and bill pay. “By integrating these services, embedded finance providers can offer a comprehensive product stack that addresses the full spectrum of SMB needs, delivering seamless and holistic solutions for platforms and their users,” says Singh.