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Embedded finance: A lifeline for SMEs in a turbulent financial market

In a speech at the Conservative Party conference, Prime Minister Rishi Sunak highlighted the importance of small and medium-sized businesses (SMEs) for the UK economy. With over 5.5 million SMEs operating within the UK, their collective impact is nothing short of significant - from job creation to economic resilience - these businesses are indeed the backbone of our economy.

Despite an undeniable influence, many SMEs find themselves on the periphery when it comes to benefiting from advancements in financial technology. Financial innovation predominately focuses on consumer needs rather than small businesses, meaning they are often disadvantaged due to their size.

Accessing a broad spectrum of financial services doesn’t need to be reserved for the titans of the industry. This is where embedded finance can step up and bridge the gap for SMEs by providing intuitive solutions tailored to their unique challenges and opportunities. The robust backbone of embedded finance coupled with SMEs’ agility is a potent combination that will help them remain a step ahead, always.

 

Helping SMEs grow with confidence

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.

 

Securing access to capital

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.

 

Increased efficiency

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. With this knowledge, SMEs can make data-driven decisions, optimise their strategies, and respond more effectively to changing market conditions.

 

Sustainability for SMEs

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.

 

A world where SMEs thrive, rather than survive

Imagine an SME without the constraints of traditional financial systems and financial tools at its fingertips. That is the promise of embedded finance. It's a world where SMEs are not bogged down by implementation, and every tool, and service is tailored so SMEs aren't just surviving but thriving.

Embedded finance bridges the gap by making grants, financial products, and essential services accessible within existing platforms. And it doesn’t stop there. Embedded finance also reduces risks and ensures SMEs get the most bang for their buck, equipping them to tackle every fiscal challenge head-on.

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