Article
Embedded lending

Embedded Lending for SMB Software Platforms

Amazon, Shopify, and Square dominate SMB lending—here’s why solution providers need to keep up.

Jared Shulman
September 27, 2021

The Big A.S.S lenders, Amazon, Shopify, and Square, are three of the largest small business (“SMB”) financiers in the country. If you offer eCommerce, Supply Chain, Payments or Point of Sale solutions to SMB customers and do not also have a lending arm, you are at risk of losing clients.

Small business struggles

Access to capital is one of the major challenges for small businesses across the country.

Compare eligibility, total cost and repayment obligations across the financing options available to your users.

As a result, small businesses seek capital from banks and alternative lenders. These two solutions have been historically unreliable, slow, and at times very expensive. Worse, community banks and thrifts have been consolidating or folding during a low yield environment reducing the already limited credit options for SMBs.

SMBs need better solutions to finance their growing businesses.

Tech fills the gap

The challenger banking model, a b-school buzz word that loosely translates to “technology companies now lend,” has been a largely successful alternative to traditional banking.

One of the keys to success is, of course, the data.

Technology companies, perhaps even like the one you work for, hold some valuable data about the performance of their business customers. Point of Sale companies can track, in real-time, revenue of a business. ERP/Inventory management companies can see the evolution of order sizes and SKUs sold. These are great barometers for the success (read: credit risk) of a small business.

Data becomes the ultimate form of collateral.

Business software can make relevant operating data available to a lender with the user’s permission. A platform may earn revenue from a financing partnership, while applicants can apply within an existing workflow. Funding still depends on eligibility and approval.

The business case

The reasons to offer lending extend beyond just additional revenue and happier customers. Adding a financing solution to your technology service has become more than just a trend — it is approaching default behavior.

Small business customers may now expect their technology vendor to offer some form of financing product.

Importantly, software companies that offer these lending solutions are winning business over competitors. Even customers that do not currently have borrowing needs are sorting based on this added service assuming they eventually will need it!

Getting started

Creating a small business lending division requires a serious investment. Specialists are required to build the application and underwriting processes, price the credit, manage the balance sheet and handle collection.

An in-house lending program needs underwriting, servicing, capital and compliance resources. Estimate those requirements for the proposed program instead of assuming a universal build cost or schedule.

Daylit offers embedded financing that software providers can make available within their existing workflows. Confirm integration requirements, underwriting eligibility and funding timelines for the proposed deployment; approval and funding are not automatic.

As small businesses continue to seek alternative sources of financing, they will increasingly turn to their technology vendors to help with bite-sized funding solutions. Now is the time to fight back against the big A.S.S lenders and offer them yourself!

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Further reading

Karen Mills describes how online lenders use business data in credit assessment. See Harvard Business School’s analysis.

Related guidance: Agricultural Lending: Data and Credit Risk; Embedded Lending for Vertical SaaS and ERP Platforms.

References

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