How embedded finance can boost financial inclusion for the smallest businesses

According to figures from the World Trade Organization (WTO), SMEs make up over 90% of businesses globally as well as 60-70% of employment. That isn’t just the backbone of most economies, it’s nearly the full skeleton!

Despite the crucial role they play, many small businesses still struggle to access the funding they need to survive and thrive.

Looking at the UK in particular, the country is renowned as one of the world’s leading business hubs, with a vibrant ecosystem of entrepreneurs, yet statistics underpin a grim reality: the startup failure rate is around 60%.

SMEs are being held back by the banks

It’s also worrying to see a recent report that revealed around three-quarters of UK SMEs believe that their bank is now actively discriminating against them in favour of their larger peers.

So why is this? Why are so many ambitious SMEs being put out of business by banks’ rigid lending frameworks?

Capital requirements represent a significant barrier to entry for many entrepreneurs planning to start, or expand, a business. Obtaining a business loan is often easier said than done. And without the necessary funding, those who don’t have extensive personal savings or familial wealth to draw upon can’t fulfil their ambitions.

Despite the data-rich Open Banking environment that now surrounds us, the majority of traditional frameworks are still based on narrow datasets, or rooted in erroneous assumptions that SMEs are too risky to engage with – which is depriving them of much-needed growth capital. Conversely, larger businesses are generally seen as much less of a risk because they typically have more assets to underwrite loans.

Embedded finance is righting these wrongs

The good news is that embedded finance platforms have stepped in to start empowering small businesses by providing them with access to financial services that were previously only the preserve of larger companies.

Thanks to embedded finance augmented by AI, credit-hungry SMEs have a timely alternative funding source that’s more accessible, more flexible and more personalised. They can bypass the banks and tap into a wider range of lenders, including peer-to-peer platforms and fintech companies with embedded finance solutions.

With AI, embedded finance has been able to streamline its process further and provide more personalised experiences to SMEs. Through augmenting embedded finance with AI, embedded finance can aggregate vast amounts of non-traditional data sources at speed, to offer instant experiences that align with the businesses needs and preferences.

Embedded finance, as it’s known, eliminates the need to rely on high-cost third parties (typically a bank) in the financing process. It’s allowing SMEs to access funding based solely on their overall business revenue, using transaction data rather than the historic, and often incomplete, credit scores that traditional financing relies on.

The benefits are numerous and compelling. For a start, the application process is conducted online with just a few clicks and a decision is made within minutes, easing the cashflow crunch many small businesses face.

In most cases, business owners don’t need to provide personal guarantees or assets to access their funds, and they don’t need to meet set repayment dates each month. Funding is authorised based on the holistic financial performance of their business, and repayments can be considered with confidence, with the business generating the revenue needed from each customer transaction.

Moving beyond funding

Embedded finance goes far beyond the funding level. It can also be harnessed by small businesses to improve their operations, increase revenue, and grow their customer base. It’s providing companies with access to a range of financial products and services directly within their existing business tools and platforms.

For example, embedded finance simplifies payment processes for SMEs by integrating payment solutions into existing checkout setups. This then enables sellers to accept various new payment methods, automate invoicing, streamline collections, and ultimately improve cash flow management. Buyers, meanwhile, benefit from a streamlined purchasing experience and the option to add financial services at the right point of need.

Embedded accounting and financial reporting tools can also provide SMEs with advanced, and usable, insights. Such tools integrate accounting, cash flow management, and reporting functionalities – allowing SMEs to more accurately monitor their financial health, track expenses, and make smarter, data-driven decisions. Access to real-time financial insights changes the game for SMEs, allowing them to identify areas for improvement and plan properly for future growth.

The way in which small businesses access funding and interact with customers, and each other, is changing rapidly as a result of the opportunities that embedded finance presents. In the next few years, these opportunities will only ramp up as the embedded finance market marches on to an expected $1.9 trillion by 2028. It’s time for SMEs around the world to finally feel financially included.