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The rise and evolution of embedded finance

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Managing cash flow – the lifeblood of any business – is challenging enough at the best of times. Then along came an unprecedented global pandemic that blindsided society and complicated matters further. Robust cash flow affords your business the ability to adapt and adjust to dynamic economic conditions; while a lack of available cash limits your options and puts your business at risk – making it easy to see why “cash is king”. Unfortunately, the pandemic’s grip on the economy has threatened to dethrone large swathes of the small and medium enterprise (SME) community by strangling their cash flow.

SMEs have been contending with damaging pandemic-fuelled pressures on their cash flow since COVID-19 struck in March 2020: payment of supply invoices are being demanded earlier than expected because of COVID-related stockpiling; supply chains have been severely disrupted; and significant delays on orders and work already completed are being experienced. According to the Federation of Small Businesses, more than three in five (62 per cent) of Britain’s 5.9 million small businesses have reported “late or frozen” payments throughout the COVID-19 pandemic.

With SMEs feeling the squeeze from the pandemic, they are seeking cash injections from alternative sources. Traditionally, any SME requiring credit – for whatever purpose – automatically turned to its bank. However, competition and innovation in the SME finance market, together with banks’ reluctance to lend in the wake of the global financial crisis, have bucked the trend. This void has been filled by Lendtech providers that offer invoice finance – and the pandemic is accelerating this shift.

Learn more:

How embedded finance is bringing innovation to the lending industry

The evolution of Lendtech post COVID-19

INVOICE FINANCE 

As SMEs face up to a deepening late payments crisis, invoice finance – borrowing against the value of unpaid invoices – has surged in popularity to provide crucial support until payment cycles resume. This has proved a vital lifeline for struggling SMEs during the pandemic.

The benefits of invoice finance are compelling – from receiving a boost to cash flow and offering customers more generous payment terms to scaling borrowing as your business grows and being easier to secure than other forms of financing. However, there are notable drawbacks that can complicate the process:

  • Lenders often struggle to meet the demands of the SME market for immediate cash injections – it can take up to eight weeks to set up segregated client accounts for new customers.
  • The fees associated with this type of financing can mount up. Typically, lenders will charge between 1 and 5 per cent of the total invoice amount in service fees.
  • There is a stigma associated with credit: businesses that deploy this financing strategy might be perceived by their customers as high risk – particularly if those customers are larger in size.

APIS: THE FUTURE OF INVOICE FINANCE

So, what does the future hold for the invoice finance space? For a start, demand for cash injections from alternative finance providers shows no signs of abating: according to The British Business Bank, “there could be significant further demand for funding throughout 2021 as businesses seek to move on from the pandemic and pivot towards growth,”

To keep pace with this demand, and offer an efficient and cost-effective service, lenders in the invoice finance space must embrace innovative advancements in the provision of business finance solutions. Currencycloud, for example, is using it’s modular APIs to support factoring and invoice finance businesses, by providing seamless access to the infrastructure needed to make it work efficiently, on an international scale.

By leveraging API technology that streamlines the invoice finance process, we can facilitate the automated reconciliation of repayments from borrower invoices via instantly created virtual named accounts – alleviating the operational burden for lenders, reducing service charges, and freeing up time to focus on growth. This represents a huge step forward for SMEs, who previously faced delays in the lending process when dealing with traditional banks, due to the lengthy process of setting up segregated client accounts. Our modular APIs also provide lenders with the flexibility to access these features without having to plug into our full infrastructure – saving time and money.

Crucially, by being able to offer accounts in the consumer or supplier’s name, Currencycloud enables lenders to disguise the loan facility that has been put in place – and in doing so ensure their customers’ financial integrity remains intact.

This ability to make confidential factoring available to lenders has paved the way for the provision of efficient and cost-effective invoice financing – opening the door to a new, improved revenue stream.

To find out more about how Currencycloud could help your business, speak with our Lendtech expert.

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