The last few years have been challenging in many ways for European businesses. High inflation numbers have led to increased interest rates, decreased spending, and instability across almost all sectors. As an effect, venture capital and banks have become increasingly more cautious with their investments and lending respectively.

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This has affected not only the fintech ecosystem, where many have become cash-strapped when capital has become harder and harder to raise. But also the 25 million SMEs that produce 52 per cent of the total value in the EU. They already had a hard time getting access to financing because banks and financial institutions tend to look at risk rather than potential. And them becoming even more risk-averse means the situation has gone from bad to worse.

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In many ways, you can say that fintechs have experienced what SMEs already have been experiencing for a long time – how risk aversion from financial institutions keeps them away from the capital they need to invest in, and grow their businesses.

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Luckily, an exciting development has taken place in the shadow of all the crisis headlines that will have implications for both European fintechs and SMEs – the emergence of embedded financing. Embedded finance has the potential to solve a wide range of financing issues and create an overall business landscape in Europe, unlocking exponential growth and innovation.

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Foundation for funding innovation
‍Buy-now-pay-later (BNPL) has been one of the hottest topics within the fintech world for quite some time now, and will continue to be so. During the last decade, we have seen an abundance of new BNPL and lending fintechs targeting different segments. The development has in many ways been facilitated by the fact that there has been no shortage of funding from investors. But at these times, with a vastly different investment climate, both emerging and existing fintechs within the space are going to experience that it is quite hard to run a lending business without access to a lot of funds.

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This is where embedded financing comes into play. Embedded financing allows fintechs to build a financing offering, without them having to obtain the funds to provide their customers with themselves. Instead of having to chase funding to get their operation going, they can focus on developing their business and offering, and integrate the funding from a partner whose niche is the funding itself. Comparative advantages, and a development that is going to lower the barriers of entry to start lending companies and lay the foundation for future fintech innovations.

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Bridging the financing gap
‍Improved financing opportunities for SMEs should be in everyone’s interest as it has the potential to lead to both innovation and growth. The market for SME lending has grown a lot during the last decade thanks to technical advancements. Several fintech companies specialized in SME lending have emerged and have in many ways contributed to bridging the financing gap, but embedded financing has the potential to accelerate the development even further.

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These fintechs have developed credit models built on data analysis and projection rather than basing their decisions on historical data. This allows them to factor in specific SME aspects and tailor their offering and terms to cater to SMEs instead of large corporations. What these fintechs do not have is the reach, especially if you compare it to the reach of banks and financial institutions.

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Incumbent banks, neo banks, and other business service providers already have established relationships with SMEs. Through embedded financing solutions they can take the SME financing that has been developed and integrate it into their existing offering, without having to build the infrastructure to sustain the operation themselves. By bringing the financing to where the SMEs already are, we can give more SMEs better possibilities to break through the glass ceiling.

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Embedded financing is going to lay the foundation for Europe to continue to be at the forefront of fintech innovation for years to come while giving us unparalleled opportunities to once and for all bridge the financing gap and give SMEs the conditions they deserve. It has the potential to take European growth and innovation to the next level and ensure that having to pass down or postpone investments becomes a thing of the past.

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Sources:
https://www.statista.com/statistics/878412/number-of-smes-in-europe-by-size/
https://www.worldbank.org/en/topic/smefinance
https://www.oecd.org/cfe/smes/2022-Update-OECD-G20-HLP-on-SME-Financing.pdf