Embedded finance
Embedded finance

Will rising interest rates impact business funding for SMBs?

Rising interest rates can pose a significant threat to the business funding market for SMBs and brokers in the United States. But with revenue-based embedded funding, there’s a solution to keep capital flowing.

The impact of rising interest rates on SMB business funding

In a bid to curb spending and tackle a 40-year high in U.S. inflation, the Federal Reserve has recently imposed the sharpest increases in interest rates since the 1980s, culminating at the beginning of November with the sixth consecutive hike since March. This is likely to have a significant impact on business funding for SMBs. That is, at least, when it comes to traditional financing. Thankfully, revenue-based embedded finance offers solutions for SMBs and brokers that can keep capital flowing. But before we explain how, let’s explore what higher interest rates mean for SMB financing.

  1. Funding Offers Become More Expensive

Central banking systems like the Fed have two instruments at their disposal to control interest rates. The first is simply setting the rate at which they lend to other banks, which has a domino effect. The second is Open Market Operations (OMO), which involves buying or selling government bonds and other major securities in the open market. This effectively takes cash out of the economy and sees financial institutions require a higher incentive to part with their capital. The outcome in both cases is that borrowing money becomes more expensive. For SMBs already borrowing at a fixed rate, this isn’t an immediate problem. But when the time comes to renew their fundings, or take out new ones, higher interest rates become a serious problem. For brokers, this means fewer SMB clients seeking financing and fewer commissions.

  1. Variable Rate Funding Lose Their Appeal

When interest rates are low, variable-rate fundings can be an appealing option for introducers to bring to their clients. Initial rates are often cheaper, and there’s the possibility that they may become more favorable over time. But with the Fed’s 375 basic point increase in interest rates since March, and reports the U.S. is heading for a recession, businesses locked into variable financing will suffer and brokers will be left with one less financial product to offer their clients. Worse still, the risk of default on variable-rate SMB funding becomes greater, and both providers and SMBs will become less likely to do business with each other. Again, this has an impact on brokers.

  1. Credit Checks Become Stricter

With higher repayments and an increased risk of default, banks and platforms become more apprehensive about giving out their capital. As a result, they’re likely to conduct much more rigorous checks on SMBs to ensure they can repay both the financing's principal and increased interest. They’re also less likely to approve applications, and less willing to lend large sums when they do. For SMBs in need of funding, this is a problem. But for brokers who only receive commissions once a funding is approved, it means considerably more work for less—or no—commission.

Embedded business funding for SMBs can help protect against rising interest rates

Embedded business funding for SMBs can help companies and introducers sidestep the challenges that arise from rising interest rates. With revenue-based embedded finance in particular, SMBs only pay a single fixed fee, followed by flexible repayments set according to their monthly revenue. Revenue-based embedded finance not only protects SMBs from changing interest rates, but other externalities such as market volatility, seasonal changes, supply chain issues, or disruptive geopolitical events.

When offering revenue-based embedded finance solutions, brokers can attract SMBs looking for business funding when interest rates are otherwise too high to consider. But they also stand a better chance of having applications approved, and therefore of receiving commissions. That’s because platforms using revenue-based embedded finance are significantly more likely, and quicker, to approve funding applications. With the right alternative finance provider, brokers can offer upto 90% likelihood of acceptance to their clients in a way that gives all stakeholders confidence.

Choosing the best alternative finance provider for SMB business funding

When choosing an alternative finance provider for SMB business funding, there are a number of questions brokers should ask in order to better serve their clients and ensure financing is approved.

Do they have a wide range of acceptance criteria?

Only 58% of SMB funding applications are approved by traditional big banks, and that’s without taking interest rate hikes into account. To instill confidence in SMBs, brokers need to offer products from alternative finance providers that regularly accept and lend to small businesses.

Do they use alternative data?

One way to ensure a finance provider has a wide range of acceptance criteria is by checking that they use alternative data. 30% of financing applications in the U.S. are declined because of insufficient credit history. While traditional finance providers rely solely on revenue history and credit scores to assess financing, revenue-based embedded finance enables platforms to use information such as google reviews, social media presence, and other metrics. That means more fundings approved, and more commissions for brokers.

Are they asking for too many documents?

Inefficient data gathering and management is a good sign that a finance provider isn’t up to speed with the needs of SMBs today. In fact, 62% of U.S. SMBs don’t believe their businesses banking offers any additional benefits compared with their personal accounts. What SMBs need are fast, simple customer journeys. With revenue-based embedded finance, data collection is more streamlined and centralized, helping brokers and SMBs to secure funding quicker.

Are they agile enough to fit all kinds of businesses?

One of the biggest drawbacks with traditional finance providers is that they only offer a one-size-fits-all approach. For the new generation of SMBs, each with their own specific needs and expectations for flexibility, this doesn’t cut it. With revenue-based embedded finance, introducers can offer more diverse, flexible business funding for SMBs that avoids the pitfalls of rate-based financing.

Final thoughts: Secure business funding for your SMB clients

With YouLend’s fully white-label revenue-based embedded finance solutions, brokers can offer their clients fast, reliable funding that isn’t as vulnerable to volatile markets or rising interest rates. Quick, automatic assessment means that financing can be approved in minutes instead of days, and edge cases can be accommodated where necessary with alternative data and human intervention. With YouLend, brokers can secure quicker, safer, more flexible business funding for SMBs.

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