Embedded Lending
Embedded Lending

Driving inclusion, ethics and access to capital

Running a small business has never been easy, but ongoing difficulties in obtaining crucial financing hamper growth and progress, especially for women, ethnic-minorities and businesses in deprived areas. But data-driven embedded finance tools can provide more access, according to research from YouLend and Experian.

Mind the financing gap

Research from Q1 2023 found that just one in eight small businesses (12%) described the affordability and availability of new finance as good, with over half (51%) saying it is poor or very poor. And that’s even worse when you dig into more specific demographics.

đŸ‘© Women in business

While 19% of all UK businesses are led by women, only 12% of total investments are directed towards women-led businesses. Female entrepreneurs also report struggling with access to finance to start a business, with 50% of female business leaders and entrepreneurs reported finding access to funding and investment hard in the past 12 months. In the same research, 50% of female business owners surveyed said they were rejected when applying for a loan or investment to fund their new business.

đŸ€ Ethnic minority-led businesses

Despite national efforts, financial access gaps persist among minority groups within the UK, with  Black, Asian and other Ethnic Minority-led businesses (EMBs) around three times as likely to see access to finance as a barrier to running their business compared to White-led firms (31%, 27% and 10% respectively). Among, ethnic minority-led businesses, 15% reported having been rejected for finance at least once, compared to 4% of other businesses. 

📍 Location, location, location

Fewer businesses from ‘highly deprived areas’ reporting external finance need actually apply. 

Those that do face higher rates of rejection, with 15% of businesses in ‘highly deprived areas’ applying for finance between 2019 and 2021 turned down, compared to 11% elsewhere. 

The result of this unequal access is that businesses that could otherwise thrive are stymied from reaching their goals, and much of the blame falls on the systems that legacy lenders still use.

Beyond the surface: How can embedded finance bring funding to these underserved segments?

Traditional lending characteristics, such as credit score, availability of collateral, and even size and sector, are still the basis of most lending decisions. This results in many SMEs being excluded from critical business financing.

The issue of size can be a catch-22, with businesses deemed too small to finance, while also being denied the capital to grow. But new data models provide hope.

Integrated financial systems, whether from open banking or real-time data from platforms such as e-commerce, marketplace or payment providers, provides a new range of data points on which to judge a company’s potential.

YouLend’s decision making model is applicant-agnostic, focusing on a broad range of business metrics to create a broader picture of the health of a business, including growth, repeat business, online traffic and efficiency. By discounting any bias of race, gender and background, our decision engine focuses on the unique strengths of the business, not the individual, ensuring that financing finds those who need and deserve it.

Analysis of YouLend financing data found that moving beyond traditional lending metrics drastically evens the playing field.

  • 32% of YouLend financing went to businesses with at least one female director, while 29% of financing went to businesses with more than 50% female directorship, well beyond national lending figures. 
  • 35% of the total YouLend financings issued were in areas where ethnic minority representation is above 30%, including 23% in UK regions with much lower ethnic-minority populations on average, indicating a strong uptake of alternative finance from otherwise underserved groups.
  • YouLend’s largest SME financing segment was to the most deprived UK areas, as defined using Indices of multiple deprivation (IMD), with 31% of fundings serving the most deprived quintile of the population.

While there remains much to be done in improving access for entrepreneurs to vital financing, this research demonstrates that there is significant value that traditional lending metrics fail to capture. Our data also found that merchants funded through YouLend see a 26% increase in sales in the 6 months after funding, showing that an alternative data approach can still effectively mitigate risk and find opportunity.

The UK is full of potential – financing providers and platforms just need the right tools to capture it.

Download 'Widening Access To Capital: YouLend's Impact Report' here

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