Revenue-based financing
Revenue-based financing

Exploring the SME opportunity with revenue-based financing for banks

SMEs have remained historically underserved by traditional lenders but revenue-based financing for banks creates a new opportunity to cater to the SME market.

Why should banks target SMEs?

They might be small companies, but SMEs are big business. In the UK private sector alone, SMEs account for over 99% of the business population, three-fifths of total employment, and around half of all business turnover. Not only that, but a recent study showed that targeted revenue-based financing for banks could unlock £140bn of additional Gross Value Added (GVA) growth by 2030 - that’s equivalent to 3.2m new UK jobs.

All of this makes SMEs extremely important for the economy, and yet, these small enterprises are frequently underserved by traditional lenders. That’s a huge untapped opportunity, which is why banks should explore how to embed revenue-based financing in order to enhance the digital experience of their business customers.

How to better serve SMEs

SMEs need funding, and they need it fast. A bespoke clothing brand or an independent restaurant is unlikely to have reserves of capital at hand to restock inventory when business is slow, and any prolonged delay in financing could mean a irrecoverable dent to growth. In fact, 8% of SMEs say that accessing finance is the biggest issue they face in operating their business - as compared to only 4% for larger companies.

The World Bank reports that micro, small and medium-sized enterprises have unmet finance needs of roughly $5.2 trillion a year worldwide, which is around 1.5 times the current lending market for such businesses - and 57% of all SME credit applications are abandoned because they’re too difficult to complete. All this to say, there’s massive demand for funding, and an opportunity for lenders to meet it by exploring revenue-based embedded finance.

Filling the gap in SME business funding

SMEs tend to be younger - 24% have been running two years or less - and according to the British Business Bank, those that have been trading less than two years are three times more likely to be denied funding than other businesses. These highly digitised, next-generation companies are increasingly looking to alternative financers for help. Over the past half a decade, fintech lenders have accounted for most of the new SME lending in the UK, and since 2019 the use of neobanks has almost quadrupled from nearly 20m users to a projected 77m in 2022.

There are several reasons why neobanks are able to meet the needs of SMEs more effectively than traditional banks. First and foremost, they have the competitive digital infrastructure required to meet an SME’s requirements for speed and flexibility. Not only can digitisation reduce approval wait time for SME funding from weeks to hours, it allows for non-traditional credit checks that are more likely to see an SME’s finance application approved, such as appealing to TrustPilot reviews for evidence of a healthy business, positive website and social media analytics and customer retention rates.

It is now possible for traditional banks to adopt embedded finance solutions, similar to their neobank competitors, and quickly capture the SME market share.

Revenue-based financing for banks

Revenue-based funding makes supporting SMEs not only viable but lucrative. Unlike traditional debt financing, it allows lenders to provide funding to a business based on a share of its future revenues, and that is extremely smart business.

Firstly, many SMEs have seasonal business models. A successful pub restaurant in a popular tourist destination will naturally have higher revenues in the summer months than in the winter. Hence, it's in the business’s and the lender’s best interest to be able to repay more when there’s money coming in, and less when it’s not.

On top of that, revenue-based embedded financing is quick. With it, established banks can use the same non-traditional credit checks as neobanks, allowing them to offer business clients more competitive terms. And because embedded financing isn’t regulated in the same way as a traditional loan, with only a one-time fee and no interest, it isn’t subject to the same time-sapping regulations.

As well as offering protection from market volatility by being more flexible to SMEs’ changing needs, revenue-based finance makes it possible to provide funding at scale, giving traditional banks a means of exploring the opportunities of SME financing in a way that’s until now been the reserve of smaller, more digitised fintechs. By partnering with specialised third-party revenue-based finance providers, they can embed this sort of funding solution in their own digital platforms with no code required, no extensive back-end builds, and no additional costs.

Considering the importance of SMEs, and the extent to which they’ve historically been underserved, is too big of an opportunity to miss.

How to help SMEs with embedded finance

As smaller businesses become more and more digitised, it’s now quicker and easier than ever to serve their financing needs, but doing so means lenders need to digitise as well.

By providing banks with a white label product they can package as a part of their own brand, YouLend’s embedded finance helps banks integrate digital services that bolster loyalty, cement lasting partnerships with SMEs, scale up offerings with no operational or regulatory overheads, and provide a seamless digital experience.

All this means traditional banks can continue to enjoy the benefits of their size and established reputations while offering a best-in-class digital service that keeps them competitive with younger fintech operations.

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