The start of a recession? Why now is the right time to be thinking about embedded finance.

Last week the new Liz Truss Government announced their energy support for small businesses in the UK. The 6-month intervention will now mean most energy price contracts will cap out around 40-50% more expensive for firms, some of whom were looking at the bleak prospect of having to shut down over the winter.

Already hit with rising interest rates, price inflation of supplies and labour, supply chain shortages associated with Brexit and the China shut-down, and weak consumer spending as we enter a cost of living crisis, it’s clear many British businesses are facing one of the worst economic climates on record.

Crashes, Covid and challenges

Online SME funding brokerage FundingXchange’s Q3 Lending Monitor showed that average cash balances held by businesses applying for funding are edging down to pre-Covid levels, as most businesses have used up their pandemic loan injections. This chimes with our own analysis at MarkeFinance, which saw many businesses take up a Covid-linked loan as a precaution, only to end up using the funds as the pandemic dragged on longer, and the economy stayed weak even after the vaccine roll-out.

While the last financial crisis in 2008 rocked financial services and the mortgage market, Central Banks were able to keep interest rates very low in the following ten-year period, which reduced the number of small business insolvencies and ensured that there was new credit flowing into the system. Indeed, many of the well known fintech companies can trace their origins to the Global Financial Crash.

But now with inflation so high, interest rates are ratcheting up at the same time consumer demand is falling, and already there are signs that banks are again slowing lending to small businesses at precisely the time businesses need working capital buffers.

What options are out there for businesses?

When businesses can’t access loans easily, they have to start investigating other ways to raise working capital. The equity market has cooled dramatically and so there is merit in understanding how asset and receivables finance can work to unlock short-term capital. Most lenders will shift to lend against hard assets or where they have tangible security. There will be greater emphasis on negotiating longer payment terms, but smaller businesses don’t usually have much negotiating power on price nor terms against the big corporations, many of whom are now again extending payments out to preserve cash.

A recent example at MarketFinance was a technology business that builds metaverse shopping real estate for large designer brands. Not able to raise equity at the valuation they wanted, they were exploring how to take expensive venture debt when they realised that their invoices to blue-chip end customers could be used with MarketFinance to accelerate hundreds of thousands in cash flow.

Smart businesses will take a look at their future plans and trim down to what is essential, and will move fast to turn assets into cash where possible and focus on projects with cash flow profiles that make sense.

One further area they should explore is embedded finance. This is a new but growing field which allows suppliers to partner up with B2B fintechs who can help insert more ways to pay and enable more credit at longer terms for their business buyers. The third party fintech essentially funds the credit terms offered by the supplier, allowing the seller of goods to be paid immediately, while allowing more time for buyers to pay, creating a win-win for both sides of the transaction.

By leaving credit underwriting to an experienced fintech with sophisticated risk models, suppliers avoid the need of having to manually authenticate and approve which customers get credit and on what terms.

Not only does this improve working capital, it’s an effective way for suppliers to signal to their small business customers they understand the difficulties they are facing, and want to help them keep up their crucial input purchases. By allowing buyers to spread the cost of their spending you reduce their need to go looking for external finance from banks or other lenders to keep ordering from you, giving them more time to focus on what’s important right now.

The future is embedded

While the previous crash was a catalyst for non-bank fintech lenders to enter the market and offer more choice, current technology will allow fintechs to embed their financial tools right into the software of B2B ecommerce platforms and relevant marketplaces. This will further drive the decentralisation of finance to the key connection places where B2B transactions are happening. Coupled with the live data that gets shared within these transactions, suddenly the speed at which a business can borrow to finance productive work increases.

By leaning into this trend, MarketFinance is already seeing strong demand from buyers for more diverse payment and credit options, and by embedding into digital website check-outs, or as links on digital invoicing and QR codes at physical tills, we’re noticing B2B suppliers win orders and contracts from buyers they wouldn’t necessarily have done in the past.

Necessity is the mother of invention, and in these difficult times we’ll continue to see innovation accelerate as resilient business owners team up with fintech enablers to get business done.