Success in embedded lending means putting the customer first. Become the financial solution your customers really need.
Embedded funding or embedded lending is an increasingly popular alternative business financing method wherein B2B companies offer financial solutions to their customers. It's basically businesses funding other businesses, much like banks and credit unions would. Besides that, embedded funding is much more convenient and accessible to borrowers — so much so that it’s quickly becoming a staple of business financing and B2B relationships.
Here are some figures to put that growing popularity into perspective. The global embedded finance market is expected to surpass $183 billion by 2027, expanding by 182% in just five years. Meanwhile, Bain & Company estimates that embedded B2B funding amounted to about $12 billion in 2021 alone.
As an alternative source of business capital, embedded funding literally gives big lenders (banks and credit unions) a run for their money. Even large companies, such as Amazon, Shopify, eBay, PayPal, and Square, are keen on offering financial solutions to their customers. That's because embedded financing mutually benefits both parties. For the borrower, it’s an easy, convenient, accessible, and affordable financial avenue.
And here's how you benefit by offering embedded funding to your customers:
You can structure embedded lending solutions in many different ways. The key is to incorporate lending options that truly bring value to your customers. In other words, give your customers all the reasons to come to you for financial support rather than going to the banks.
Let’s take a look at nine common B2B lending and funding options worth exploring:
A business loan is the most versatile type of funding you can offer your B2B customers. Borrowers can use term loans to fund any venture, from launching new startups and covering cash flow needs to expanding an enterprise. A loan is also a generally straightforward and well-understood lending product.
You can offer either long-term or short-term loans, or even both, depending on your audience. Short-term loans are typically unsecured quick loans payable within a year or two. A long-term loan has a 5+ year payback period and is usually secured.
BNPL is the most popular embedded funding approach — although it’s more of a customer financing solution. The buy now, pay later borrowing volume in the US hovers around $92 billion and is expected to exceed $100 billion by 2024. And according to a 2021 survey, 3 in 5 shoppers have used BNPL services.
As the name suggests, BNPL is a POS (point-of-sale) financing service that allows customers to purchase on full or partial credit and pay the debt over a couple of weeks (either with or without interest). It’s ideally designed to encourage customers to buy more. But for B2B businesses, it can be a means to build long-term supplier relationships with clients and drive repeat business.
Asset financing is a great way to help your customers acquire equipment, machinery, real estate, or other business assets. There are five main ways you can offer asset financing, depending on the nature of your business and its position in the B2B ecosystem:
Line of credit is another versatile business funding product. It's similar to a bank line of credit but with terms perfectly aligned with your customers' financial needs. You offer a loan or capped credit pool that the borrower can draw within a stipulated window, typically one or two years. The line of credit can be revolving, where the borrower can repeatedly draw and repay the loan, or non-revolving, where the available credit does not replenish after repayments.
Many SMBs use lines of credit for financial cushioning, mainly to fill unexpected gaps in cash flow or working capital.
A business credit card is a type of revolving line of credit. Unlike personal credit cards, business cards come with additional perks such as higher limits, lower rates, bulk withdrawals, and business rewards. Branded credit cards would be a great addition to your customer loyalty program. And in addition to growing your customer engagements, branded credit cards will improve customer insights by providing you with detailed financial reports.
A merchant cash advance (MCA) is a short-term loan for businesses needing a quick financial fix. If your customers often find themselves in financial jams, this might be just what they need.
The way it works is that you extend cash to the borrower in a lump sum. You then take a small portion of the borrower's daily sales as repayment, usually through automatic bank withdrawals or POS deductions. An MCA is only a temporary fix, not a primary business capital source. And that unique repayment arrangement best suits businesses with high and stable sales volumes.
With this type of funding, the customer sells their uncollected invoices to you at a discounted price, typically at 70% to 90% of their value. It then becomes your responsibility to collect the outstanding invoices for their full amount. This works with other receivables as well, including promissory notes, tax returns, and payment advances.
Most entrepreneurs factor their invoices to free up working capital in between purchases and payments.
A working capital loan is a type of term loan specifically meant to fund day-to-day business operations. In some cases, these loans are disbursed in phases over several weeks or months. Such loans are ideal for startups preparing to hit the market and businesses struggling to stay afloat during low seasons.
These are loans used to launch new startups, acquire or expand existing enterprises, buy franchises, or establish new business branches. An acquisition financing deal may be a massive undertaking involving many different types of loans, such as asset financing, term loans, and working capital loans.
Acquisition loans are not your everyday business funding solutions. But offering them lets your customers know they can count on your support when the time comes to grow their businesses or venture into new territories.
Alternative lending is the go-to funding solution for many SMBs and startups. In January 2023, the loan approval rate among non-bank lenders stood at 27.8%, compared to a mere 14.4% in big banks. This discrepancy is one of the main reasons entrepreneurs opt for alternative financing rather than taking chances with big lenders. And the demand for alternative funding only grows as more players join the industry. Now is the time to jump on this opportunity.
Fortunately, you don’t have to be a fintech guru to become an embedded lender. And you don’t have to waste time and money setting up an expensive loan origination infrastructure. Loanspark can take care of all that for you.
We partner with B2B businesses to help them leverage the rapidly growing and lucrative embedded funding venture. Our co-brand partnership — comprising Business Lending as a Service and Marketplace as a Service, among other fintech solutions — enables you to structure, host, and market meaningful B2B funding products. Also, our financial experts will guide you in making the right choices when designing financing products for your customers.
Let Loanspark turn your company into a competitive, value-added embedded lender in your business community in as little as 14 days.