Embedded finance
Embedded finance

Embedded finance: Providing working capital solutions to SMEs during inflation

With inflationary pressure increasing, traditional lenders consider embedded finance as a way of offering fast, flexible and affordable working capital solutions to their SME clients.

Rising costs a cause for concern  

As inflation soars to a historic high, traditional financing is struggling to provide working capital solutions to small to medium-sized businesses when they need funding the most.

41.5% of small businesses have experienced inflationary pressure in the last 1-3 months and Bankrate has reported that the situation is only going to worsen. In the next year, lingering supply-chain bottlenecks, labour shortages, and price fluctuations for energy and food will collectively take their toll on SMEs.

11.7% of SMEs say their supplier's production has been affected by increasing gas prices

With current inflationary pressures, one quarter of small business owners are concerned about whether their business will survive. A further 51% of small business owners say they don’t believe the pressure will be relieved by the end of 2022. They’re right to be concerned. Forecasters predict that we are on the path to a recession that might be worse than 2008; meaning mass layoffs, businesses closures, and consequences for everything from job prospects, student debt to fertility rates.

How does the UK's inflation at 10.1% compare with the rest of Europe? |  Evening Standard
Exhibit 1: UK inflation rate hits a historic 40-year high

Larger enterprises are well equipped to ride out inflation, but SMEs have unique requirements that make them susceptible to change. Let’s imagine a small, independent restaurant that might be profitable, but in order to pay staff overheads, rent, bills, source produce, and reinvest in equipment and repairs - they require a degree of access to working capital. Not only that, but since their business comes mostly from visiting tourists, revenue is both seasonal and uniquely susceptible to economic downturns. With high inflation, the cost of produce goes up. So does the price of fuel required to transport and cook it. That means less money left over to pay staff and bills. Inflation also makes people more likely to tighten their purse strings, meaning fewer tourists at high season. That’s why this year Just Eat and YouLend launched a £1 million financial support package to help small businesses face down inflationary pressures. It’s also why many other platforms and lenders are looking for ways to help.

Issues with traditional financing 

Despite their obvious need, many promising SMEs struggle to attract financing to maintain cashflows. Here are some of biggest issues that arise with traditional financing options:

  • Speed is crucial for SMEs. because they have relatively little working capital available, any holdup in payments can make or break them, and access to credit is essential. Roughly 57% of UK small business owners have experienced problems with cashflow, and 69% have concerns about maintaining it. Despite this, 8% of SMEs say quick access to finance is the biggest issue facing their business.
  • Complexity is a major deterrent for SMEs when applying for credit. Many traditional platforms use slow, complicated systems, leading to 57% of all SME credit applications being abandoned because they’re too difficult to complete.
  • Reliance on traditional credit checks is preventing traditional lenders from giving SMEs the support they need because they only use two simplistic inputs: revenue and operating history. However, embedded finance allow non-traditional credit markers— such as online reviews and social media trends—to be used when assessing an application as well.
  • High interest rates and repayments mean that many SMEs don’t even attempt to apply for credit, fearing that economic instability will land them in a difficult situation later.
With inflationary pressure bearing down on SMEs, it is more urgent than ever to upgrade traditional funding solutions - and revenue-based finance emerges to be the ideal solution.

How embedded finance can provide working capital solutions to SMEs during inflation

Revenue-based financing supports SMEs through times of inflationary pressure better than any other solution, relieving their cashflow problems with quicker turnaround than traditional financiers, and releasing funds in minutes rather than weeks. 

Fully integrated embedded finance solutions make credit applications a short, seamless experience, and YouLend’s white-label products enables platforms to give their customers a seamless journey from application to approval. Because revenue-based finance is free from the regulatory restrictions that limit other kinds of funding, YouLend lets platforms rely on non-traditional credit markers from SMEs to offer them a working capital solution. Finally, because revenue-based financing allows SMEs to repay a percentage of revenue, rather than a fixed rate, it gives them the confidence to seek credit regardless of seasonal fluctuations in revenue, or the more volatile and unpredictable effects of inflation.

Final thoughts

The economic future is uncertain, and it seems likely to get worse before it can get better, but YouLend’s revenue-based financing can help lenders support the vital SME ecosystem with flexible and affordable financing solutions through any economic climate.

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