A lack of accessible finance presents a threat to small businesses globally with many businesses finding it difficult to access the funds they need when they need them.
As embedded finance providers partner with the platforms small businesses already use and can access their data, they can gain a comprehensive understanding of a business’ revenue and pre-approve funding for SMBs – eliminating the fear of rejection, suggests Rob Straathof, CEO of embedded finance provider Liberis.
Rob Straathof, CEO, Liberis.
Small businesses form the foundations of most economies around the world yet they have long struggled to secure the financing they need to expand their operations – or even just to stay afloat in today’s volatile economy.
According to recent data from the British Chambers of Commerce (BCC), for example, half of the UK’s SMEs are having difficulty accessing finance. On top of that, 70 per cent haven’t attempted to access finance from an external provider in the past 12 months – it’s often seen as a hurdle too large to even try to jump.
Over recent years, many banks have retreated from small business lending, claiming it’s too risky. Figures from UK Finance showed gross lending to SMEs dropped 22 per cent to £14.3billion in 2023 from £18.4billion in 2022. The group blamed “demand uncertainty, higher interest rates, and the impact of lending taken out during the pandemic”.
Opening up to alternative sources
It doesn’t need to be this way. Thanks to fintech innovators, there are now a plethora of alternative funding sources available in the market.
Revenue-based finance, for example, is one of the most valuable and cost-effective funding options currently available to small businesses. This is an alternative form of finance that enables merchants to access funding based solely on their overall business revenue.
Unfortunately, most merchants are unaware of the benefits with 83 per cent of customers unaware of what revenue-based finance is, according to our data. This is because they have become almost pre-programmed to only explore traditional forms of finance, such as equity debt or term loans. While these may be more widely known forms of business finance, they’re not necessarily the most suitable options, or ones which align with the goals of the business.
Revenue-based finance has actually been around for decades in some form. Historically, it has been predominantly used by the oil and gas, pharmaceutical, and film production industries – which have all made good use of its flexible terms.
Over the past few years, revenue-based finance has become more widely used, offering more merchants a path to funding without the constraints of debt or equity dilution. It’s helping small businesses around the world to finance their marketing efforts, fuel overseas expansion, or simply smooth out cashflow issues.
Using data to redress the balance of fairness
Revenue-based finance has become a more compelling funding source in the age of embedded finance and open banking.
Small businesses are moving away from traditional banking and towards more integrated financial services that have been seamlessly embedded within their preferred marketplaces and platforms, whether that’s the likes of Amazon or social media giants like Facebook and Instagram.
With more merchants seeking innovative financial solutions that meet them where they are present, the global embedded finance sector is booming, and expected to hit nearly $2trillion by 2028. And as embedded finance providers partner with the marketplaces and platforms small businesses already use and can access their data, they can quickly gain a comprehensive understanding of the merchant’s revenue and pre-approve funding – which eliminates the fear of rejection.
This is one of the core advantages of the data-rich open banking environment. It enables fintech providers to holistically analyse a merchant’s revenue patterns so they can provide a tailored funding solution that sees them only paying back a percentage of their earnings, when they earn. This more equitable and efficient funding process opposes traditional financing methods which are often slow and rigid.
Unlocking a range of benefits
Revenue-based finance offers merchants a number of clear benefits.
Firstly, it’s fast.
They can typically apply in minutes and receive funding within 24 hours. Most providers will take them through a due diligence process to determine whether or not they are eligible and will quickly communicate their decision.
The funding is typically provided through the merchant’s relationship with the technology they already use and trust – if that’s an e-commerce platform or even accounting technology. The revenue-based finance provider would typically partner with those platforms, providing them access to the merchants anonymized data. Depending on their sales metrics, the financing provider may offer additional tranches of capital as they grow, rather than via a lump sum.
Secondly, it’s flexible.
If revenue slows down, so will repayments – extending the pay back period. Repayment of the loan is usually set at a fixed percentage of daily or monthly revenues, plus any fees on the amount advanced. This payment structure allows merchants to better absorb revenue fluctuations, and usually there is no specific payment date or late payments fees.
So, unlike with traditional forms of finance, they don’t need to worry about scraping cash together in time for set repayment dates each month. And since payments are a percentage of revenue, merchants will pay more during more lucrative months and less during slower months. This is especially useful for seasonal businesses, such as those in the hospitality sector.
Thirdly, revenue-based finance is less risky.
There is no requirement to give away any equity or control to external investors, nor are there any stressful personal guarantees. Instead, the funding is more cleanly provided based on the overall health, and prospects, of a business.
Finally, it’s much more transparent – something small business owners have been crying out for during a tough cost-of-living crisis. They know what they will have to pay to reimburse the loan, and there are no hidden payments or nasty surprises.
Revenue-based finance is a perfect example of the power of open banking in action. It opens up new routes for small business owners to secure crucial funding whilst streamlining the process so they can focus on their core operations. It’s helping fintech providers to offer new financing solutions to small businesses that not only need them, but also deserve an opportunity to grow.
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