Embedded finance
Embedded finance
Financial inclusion
Financial inclusion

Banks and SMEs: How to win with revenue-based financing

Banks who offer revenue-based financing to their SMEs have a way of winning the advantage over neobanks. Hint: No product build needed.

Revenue-based financing is taking aim at the SME banking market. For incumbents, this marks the arrival of a significant new competitive threat and a major new opportunity.

What’s more, revenue-based financing is also a major opportunity to support SMEs in recovering the UK economy. Thousands of UK businesses were negatively impacted by the pandemic which had catastrophic impacts on individual’s incomes. Actually, a McKinsey study found that 80% of SMEs said their revenues had taken a hit - with some sectors faring worse than others.


Why are SMEs so important? SMEs make up 99.9% of the business population. They account for three fifths of employment and around half of the turnover in the UK private sector alone.

With SMEs pinning up the UK economy for jobs and turnover, now more than ever, supporting small businesses with easily accessible funding is crucial for recovery and rebuilding the economy. In fact, a recent study found that targeted support for SMEs could unlock £140bn of additional Gross Value Added (GVA) growth by 2030 equivalent to creating ~3.2m new jobs across the UK.

In this blog, we’ll look at how revenue-based financing helps banks better support SME customers. And we’ll look at why the digital advantage is not just for neobanks.

How revenue-based financing helps banks better serve SME customers

SME customers are more varied and need different services from banks compared to larger companies. That’s because their revenue streams are lumpier and they are more exposed to risks - like staff absences or business locations being damaged.

This has led to it being difficult for banks to tailor services to each of these small businesses. With embedded finance options like revenue-based financing, this all changes. Banks can finally better support SMEs.

What is embedded finance?

In a nutshell, embedded finance providers specialise in financing solutions so they can scale up financial support, especially if they work exclusively with SMEs. So if banks partner with a provider that specialises in SMEs, they can offer a great product and experience adapted to SMEs all in their own branding.

It's best of both worlds: they build up their relationship with an important customer segment and their brand, while offering a product that is cutting edge. All without having to navigate the hurdles that would come from doing it themselves.

In terms of managing risk for both the SME and the bank, some embedded finance providers use a combination of different risk models that look at traditional credit risk information but also digital data points such as website visits and advertising.

This means you will be able to accept a far higher number of applicants.

📕Further reading: Embedded finance products: Risks and rewards.

How revenue-based finance supports SMEs

All SMEs, regardless of their size or industry, have the same requirements to get debt financing from banks, despite the fact that a two-person food truck and a 50-person printing press have wildly different financing needs. But the indicators of whether they will be successful are very different: one is much more sensitive than the other to employees being sick, or theft, or seasonality. Fundamentally, it's often the risks and inconsistent revenue streams that mean SMEs often struggle to seek alternative funding when they need it.

And that’s where revenue-based finance comes in. It gives businesses capital in exchange or a percentage of revenue each month.

By leveraging revenue-based finance models, banks can link the outflows of SMEs to their inflows, and significantly reduce pressure on SMEs because it allows them to scale up or scale down on paying back funding depending on revenue. This allows them to stay solvent when times are lean, and grow fast when there are opportunities.

How revenue-based finance providers support banks

Revenue-based financing through a partner - that has the right technology in place - enables banks to make lending decisions within days, not weeks.

This major benefit is why many banks lean on an external revenue-based financing provider. As whilst there are a myriad of benefits of integrating revenue-based finance to better support SMEs, often, banks struggle to build this in-house or get the necessary regulatory approvals.

Leveraging a third party to manage revenue-based finance, banks can benefit from:

  • Faster go-to-market - Providers are able to build and deploy a solution in as little as days depending on how integrated the bank wants to be with the provider. This enables banks to launch pilots and test this new solution quickly. It also means Banks can start supporting their SME customers faster, keeping them relevant in the current uncertain economic climate.
  • No need to build a product internally - Or navigate the complex legacy systems and safeguards in place - the embedded finance provider can manage all that. It can also provide the capital needed for the financing products, making the whole partnership extremely low-risk for the bank.
  • Brand is preserved and bolstered - Using an experienced third party that is white-labelled and offers services within the Bank’s environment means the bank preserves and bolsters its brand equity.
📕Further reading: How to grow your merchant base with embedded finance solutions

The digital advantage in revenue-based financing: it’s not just for neobanks

Neobanks are often referred to as “challenger” banks and are different from typical lenders. Essentially, they are banks that started out as purely digital offerings, with no physical branches, and a limited set of products, sometimes no physical card. This has typically enabled them to be more nimble and react quicker to customer needs - like first direct or Varo Bank.

As a result, Banks get a lot of competition from neobanks because of the focus on the customer experience route to acquiring customers - for example, through user experience, gamification, friendly and jargon-free language. In fact, since 2019, use of neobanks has almost quadrupled (c.20 million users: 2019, c.77 million users expected in 2022).

Despite this, the number of neobanks that cater only to SMEs is low - with 21 sited in Europe. There’s therefore a huge opportunity for traditional banks. But given the demand for supporting SMEs now, banks will need to act fast.

The volume of neobanks competing in this space is likely to grow rapidly. Neobanks are renowned for aggressive growth targets and SMEs are a great way for them to grow their customer base because they are a very diverse group and traditionally, SMEs aren’t very well served by banks. To help them achieve these targets, neobanks are quick to adopt any technology that will help them gain the advantage over incumbents - for example, by combining new products, such as embedded finance solutions, with powerful digital journeys that delight their customers.

Yet, these fully digital embedded finance experiences are not just for neobanks. Incumbent banks can leverage embedded finance products too. And that’s why revenue-based finance providers are so crucial to the SME customer offering.

By doing so, traditional banks can better fulfil customer needs by opting for these fully digital, one-stop-shop experiences in order to retain their positions as trusted business partners to their SME customers.

Support SMEs with revenue-based financing

Revenue-based financing is the perfect funding option for SMEs that don’t want to leverage equity or personal debt to fund business growth. Or that don’t have the type of business longevity or revenue stream profile that would generate attractive offers or even just get them approved for funding by banks.

And that's why leading banks are bolstering their services and solving SME challenges by collaborating with embedded finance providers.

This means they can more quickly serve existing SMEs and reach new customers due to being able to provide them with the funds they need, when they need them - whilst reducing the pressure on times when the business doesn’t need as much financial support.

Put simply, the banks that move first will be able to better serve their SMEs by being more inclusive, flexible and providing products that are fit for SMEs needs. By partnering with a revenue-based finance provider, they are able to go to market faster, and build their brand and reputation as the go-to for SME support.

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