Small and medium-sized businesses are lean and nimble operators disproportionately affected by a lack of access to affordable and timely financial services. 

Although many financial institutions offer a wide range of services, including different accounts, cards and loans, traditional providers have burdensome onboarding processes. This leaves small businesses underserved because they’ve not been in business long enough to qualify, they don’t have months to wait for a bank approval, or they need to spend their working hours running their business, not waiting in line at a bank branch. 

Luckily, fair, inclusive and expedited financial services are now becoming readily available through an emerging industry called ‘embedded finance’.

What is embedded finance?

Embedded finance is the delivery of financial services through a partnership with a technology provider, rather than a bank or other traditional financial institution. Embedded finance partnerships are typically technology-driven and provide an end-to-end solution for small businesses, from application to payment. 

Embedded lending

Lending institutions are increasingly partnering with software platforms to offer small business loans. These platforms use business data that enables modern underwriting models based on real-time sales rather than historical information. 

Modern lenders can provide capital almost instantly helping SMEs make payroll, replace a critical piece of equipment, or stand up a pop-up, rather than weeks or months later when the opportunity has passed or the damage has been done. 

These financial products also help companies to avoid late payment fees, which often stem from fluctuations in cash flow, because the payback is automatically deducted from credit card processing receivables.

Embedded payroll

When employees need to be paid, small business owners face several challenges.

First, tax and wage compliance can be very complicated. Many national and sub-national governments have their own set of laws that determine when overtime should be paid to an employee who works more than eight hours a day or 40 hours a week.

Businesses must comply with complex wage-and-hour laws that often result in the need to complete extensive paperwork. A small business owner might have to track pay rates using accounting software or manually calculate rates for each employee according to local laws.

Embedded payroll platforms have automated this process, allowing small business owners to set a single pay rate and enable their staff members to clock themselves in and out using company hardware or even staff mobile apps. 

The platform then determines which employee hours qualify for rate multiples (such as overtime, night shifts, split shifts, etc.) and routes a convenient approval request at the end of each pay period. Once approved, the platform initiates payment to the employee’s preferred account or wallet. 

Embedded accounts payable

Small businesses that operate on thin margins can risk supplier relations issues, evictions and even closure if they don’t manage cash flow. Using the best suppliers and paying them the right amount at the right time with the proper payment methods can mean thousands of dollars and hundreds of hours gained at the end of a year. 

With embedded accounts payable, entrepreneurs no longer have to wait for suppliers to manually send invoices or cut and file checks during each transaction. Instead, purchase orders can be automatically made when stock levels hit certain limits, invoices can be digitised and automatically routed for approval via mobile alert, and all parties receive an instant notification once payment has been made.

With all payables digitised, managed, approved and tracked in a single platform, business owners can stay on top of expenses and ensure they’ve the positive cash flow to run their shops without surprises.

Final thoughts

Although traditional banks may still offer the widest selection of financial products and services to SMEs, their product suite misses the mark on speed. Embedded services have emerged as a viable alternative because they enable small businesses to solve the problems that they have today. 

Three strategies are starting to play out that are only accelerating this change:

1. Some banks accept their role as a wholesaler rather than retailer and partner with FinTechs to embed finance in direct-to-customer technology platforms

2. Some banks are significantly growing R&D budgets, adopting agile product development methodologies and investing more in proprietary technology

3. Some FinTechs are becoming banks, either through acquisition or through regulatory channels to get licences

The net effect for small businesses should be broader access to more tailored financial services faster, giving them an even playing field to compete with large corporations.