E-commerce businesses and the future of funding
Inflation is threatening to take a toll on SMEs on more than one front. In addition to the usual increased supply costs and lower sales, it will make business funding more expensive on average - but particularly in the case of small e-commerce businesses.
Whether it’s a custom jewellery making shop purchasing raw materials, or a reseller of rare books looking to stock inventory - the current inflationary cycle presents a huge challenge for e-commerce businesses with few tangible assets. When interest rates rise, they are the first to hear ‘no’ on their loan applications. That is why offering flexible business funding for e-commerce SMEs can be such a differentiator for marketplaces and platform providers today.
The challenge of flexible business funding for e-commerce SMEs
Securing funding for these small businesses has become increasingly difficult today. According to the British Business Bank, 3 in 5 merchants have reported seeking some form of external financial support in the three years leading up to 2020, up from just 2 in 5 in the three years prior to 2019. With fears of a recession right around the corner, and regulators making noise about scrutinizing how banks treat SME borrowers even more, this is unlikely to improve anytime soon.
On top of that, e-commerce businesses have their own set of challenges; most of them are relatively young—24% have been running for two years or less, and 34% for three to four years—and they’re increasingly looking externally for funding. Historically, lenders look for businesses to have a minimum of two sets of filed accounts (three years of trading), a long history of profitability, and potentially evidence of assets on a balance sheet—all things an asset-light e-commerce business does not have. In fact, separate research by the British Business Bank shows SMEs that have been trading for less than two years are three times more likely to be rejected for funding than any other business.
It's also often the case that e-commerce businesses need much quicker funding times than what traditional funders can offer. The biggest strength of e-commerce businesses is often that they are more convenient and faster than brick-and-mortar stores. When a small but successful online record store needs capital to quickly fulfil an unusually large order, a long wait time means the customer can decide to go to a face-to-face store instead. According to a survey carried out by YouLend, 39% of e-commerce businesses choose a financing provider that can supply a funding solution in under a week, compared to only 8% of businesses outside of e-commerce.
This unique combination of factors means that e-commerce businesses require innovative financing solutions.
Funding e-commerce businesses through embedded financing
E-commerce platforms can solve these challenges for their businesses by partnering with an embedded finance provider.
When it comes to speed, embedded financial solutions can put funds in a seller’s bank account in as little as a few hours. When powered by a robust integration with the hosting e-commerce platform, the whole process could require as little as a couple of clicks. No physical documentation needed, no in-person meetings at a bank, and a financing offer in front of the business owner sometimes in minutes.
With the right credit decision model, an embedded finance provider can also approve up to 90% of applications while still offering terms that beat the rest of the market; as long as the credit decisions are based on a wide range of data points - and not just traditional backward-looking financial performance.
And as for the problems posed by seasonal or lumpy sales, revenue-based financing options mean that e-commerce stores can pay back their funding as a percentage of periodic sales, instead of through fixed payments. That means that on weeks where sales are unusually low, repayments are lower, and vice versa. That means asset-light businesses can maintain the agility that gives them a competitive advantage to start with, avoid the risks posed by variable interest rates, and sustain healthy cash flow and repayments.
These advantages that are unique to embedded financing integrations totally change the options available in flexible business funding for e-commerce. It’s easy to see why it can be such an enabler of growth for e-commerce platforms.
YouLend’s financing solution for SMEs
YouLend provides tailor-made embedded finance to help merchants and their customers alike - both in the form of white-labelled solutions that prospective lenders can repurpose for their own needs, or deep API-led integrations.
Ultimately, digitisation, COVID-19, and other recent events have changed the lending landscape for good. This change is only going to gain momentum and building asset-light businesses is the great way to weather future challenges. However, the provision of access to quick, secure funding through embedded finance integration is the only way to help these businesses grow with confidence in the years to come.