Embedded finance
Embedded finance

Combatting the cost-of-living crisis in the U.S. with business funding for merchants

Like much of the world, the U.S. is experiencing its worst cost-of-living crisis in decades as SMEs struggle to stay afloat. However, business funding for merchants can help small businesses keep their operations strong through this volatile time.

Impact of inflation on SMEs in the U.S. 

The cost of living crisis is a problem across the board for companies of all sizes, but things have been difficult for SMEs for some time. In just the first two months of the COVID-19 pandemic, 22% of small companies in the U.S. went out of business. Now, with inflation, the cost-of-living crisis looks to be even worse as SMEs struggle to keep their businesses afloat.

  • Operational costs have skyrocketed as 26% of SMEs have seen their costs increase by 20%
  • Inflation has driven over 80% of small businesses to hike their prices, which leaves a damaging impression on their hard-earned customer loyalty
  • Many business owners have been forced to cut costs by reducing inventory and spending less on marketing, again affecting their customer relationships and sales prospects
  • SMEs already have less working capital than their larger counterparts. With costs squeezing cash flow even further, reduced operability and the need for layoffs are a serious threat
Source: Global Inflation Tracker, Financial Times

What options do SMEs have to survive the cost-of-living crisis?

Inflation will always be with us, but the current crisis will eventually level off. The Biden Administration’s Inflation Reduction Act includes several measures to support small businesses. However, in the meantime, SMEs have two choices: stay small, or grow. There are advantages to each, but they both require investment.

  • Staying small by regulating cash flow will require businesses to cut back on nonessentials and acquire a very basic form of cash flow financing to maintain inventory and operational costs. Oftentimes, for SMEs, savings are not enough to prevent the business from shutting down and additional financing is required to keep the business afloat. 
  • Capacity building with financing can help a small business generate enough revenue to stay ahead of inflation and the competition - but this requires a sizeable round of business funding for merchants that will equip them to manage hiring, expansion and other operational costs.

Hence, whether a business plans to stay small or scale up - some form of funding is required.

In March, the Federal Reserve approved its first interest rate hike in two years as a means of tackling inflation, and six more hikes are forecasted for 2022. Accessing credit for investment has always been a struggle for SMEs, but higher interest rates will make it harder still. Fortunately, embedded finance provides a solution.

Business funding for merchants can help SMEs outpace inflation

To survive the cost-of-living crisis, one way or another, SMEs will need to invest. Traditional debt financing has always been hard for small enterprises to access, and rising interest rates make it increasingly unattractive. Here’s how revenue-based embedded finance can make business funding for merchants more accessible:

  • 43% of SMEs claim that paying operating expenses is their biggest challenge. With limited cash flow, fast access to credit is essential. Embedded finance allows financing to be approved in minutes instead of days.
  • More than three quarters of small business financing applications are rejected by traditional lenders in the U.S. This is due to a combination of regulatory restrictions and an inability among lenders to consider non-traditional credit markers. Revenue-based embedded finance isn’t subject to the same regulations as traditional financing, and can use a variety of credit indicators to approve funding, including online ratings and social media following.
  • With the U.S. central bank planning to raise interest rates to 4.4% by the end of 2022, and serious uncertainty around the economy for the foreseeable future, traditional debt financing will make many small businesses hesitant to seek funding. Revenue-based embedded finance doesn’t use interest rates, and allows businesses to weather economic volatility by repaying a fixed percentage of their revenue.

Embedded finance providers help platforms support small businesses

In the United States, 28 million SMEs account for nearly two-thirds of new private sector jobs in recent decades, and it’s crucial for the economy as a whole that they’re supported. YouLend’s revenue-based embedded finance solutions help platforms provide a best-in-class experience and financing to merchants from application to approval. A good provider can offer the following:

  • Full white-label integration
  • A seamless, embedded customer journey
  • Approval rates that motivate merchants to apply for funding 
  • Instant payout options
  • Revenue-based repayments
  • Access to non-traditional credit checks
  • Robust risk assessment models that ensure default rates remain low

Final thoughts 

The cost-of-living crisis in the U.S. is going to be with us for some time before it gets better. Hence, if the SME ecosystem is going to survive, businesses need access to new kinds of financing. 

Whether a platform’s clients are looking to grow or stay lean - embedded finance solutions are here to supply business funding for merchants that is needed to secure their future.

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