Merchants across the world rely on credit to expand and scale their business – be it by investing in their marketing efforts or restocking their inventory with fast-moving-high margin stocks.
However, as per recent estimates by the IMF, there is still a USD 5 trillion SME financing gap, and the issue is most pertinent in developing economies. As most merchants can’t secure credit from formal sources, they often prioritize their personal goals over their business goals and, as a result, are forced to limit their operations and thus ultimately fail to realize their businesses true potential.
Embedded finance has the potential to solve this problem and, if properly integrated, can unlock tremendous growth opportunities for both your merchants and your platform. In today’s blog post, we will explore exactly that and more.
What Does Embedded Finance Mean for B2B eCommerce Platforms and Marketplaces?
One of the first aspects we need to understand is how can eCommerce platforms and marketplaces leverage embedded finance for their merchants.
Essentially, embedded finance offers a number of different solutions ranging from payment interfaces to tailored credit offerings. In the context of bridging the finance gap among SMEs, tailored credit solutions such as a flexible credit line, working capital loans, B2B PayLater, GMV financing and merchant cash advance can play a significant role.
Let’s understand each of these better to get a complete picture.
Flexible Credit Line
Unlike a traditional lender, which offers a fixed credit line based on the individual’s creditworthiness and working relationship with the institution, a flexible credit line offered via embedded finance forecasts the merchant’s credit requirements based on a variety of data points and accordingly offers a flexible limit. This enables the merchant to take advantage of demand hikes in seasonal businesses and festivals by availing credit which is directly available at their procurement platform.
Working Capital Loans
Another use case of embedded finance is to offer working capital loans to merchants registered on your platform. Since a majority of merchants can’t secure approval from formal lenders due to a lack of standardized documents or the lender’s inability to accurately assess the merchant’s creditworthiness, embedded finance can act as a helpful bridge in this case.
B2B PayLater
B2B PayLater financing enables the merchant to restock their inventory and expand their business while maintaining a consistent cash flow. With B2B PayLater integrated directly at your checkout screen, your merchants can place an order and pay for it after a mutually decided time period. This will ensure that your merchants always have affordable and easy access to financing.
GMV Financing
Similar to B2B PayLater, GMV financing is another embedded financing solution which enables your merchants to instantly access capital without ever leaving your platform. Essentially GMV financing is a credit offering which captures your merchant’s historical order data and then uses that to offer them a flexible loan with transparent and risk-based fee. The biggest benefit of a GMV loan is the fact that the loan amount is entirely flexible, and the entire process is hassle-free, meaning the entire loan journey is completed without ever leaving your platform.
Merchant Cash Advance
The last use case of credit-based embedded financing is merchant cash advance, wherein you can offer your merchants short-term capital based on their accounts receivable data. Unlike a traditional lender who only considers standard credit scoring variables, you can assess additional metrics available on your platform and use that to offer timely short-term capital.
Benefits of Offering Embedded Finance
The benefits of offering embedded financing solutions on your platform are many. Some of the most significant ones are shared below.
Increase in Average Order Value
One of the first and biggest advantages of offering embedded credit solutions is the drastic increase in the average order value in your platforms. The reason behind this is simple – once the merchants on your platform get access to affordable credit, their entire mindset will change.
Instead of limiting their inventory restocking processes to the amount they can self-finance, they will purchase more stock, widen their product portfolio, and, most importantly, purchase high-margin SKUs. With unified access to credit, your merchants will shift from focusing on their cashflow management goals to their business goals and, as a result, increase your platform’s GMV, logistical efficiency and Average order Value (AOV).
Capture more Market Share
Today, most retailers generally partner with at least 5-6 distributors and thus have a wide portfolio of products to offer. This allows them more bargaining power in terms of product pricing as well as financing terms. As a result of this, during festivals and seasonal demand, most merchants frequent distributors who can offer them a competitive rate and, most importantly, the best financing terms.
A great way to challenge these local distributors and capture their market share is to offer embedded credit on your platform. The reason behind this simply being – as most of these offline retailers offer informal financing, they charge high-interest rates and are mostly less transparent in their offerings. By leveraging an embedded financing solution, you can not only take advantage of a transparent and standardized process but also pass on the benefit to your merchants in terms of affordable fees and fixed rules and regulations.
Increase Your Platform Retention
Offering seamless and affordable access to credit within your platform will have a definite positive effect on your platform’s retention. As your merchants don’t need to leave your platform to avail financing, it will ensure that they choose your platform over others. Along with this, leveraging an embedded solution will help you offer a paperless and hassle-free process making the process much easier as compared to a traditional lender, adding to your benefits.
Decrease your Activation and Acquisition Ratio
Most B2B platforms have very high acquisition costs, mostly in terms of onboarding charges and incentives offered to merchants. As embedded finance is still a new offering, being an early mover will ensure that your acquisition and activation costs go down significantly, as more merchants will be more likely to choose you without the allure of incentives.
Along with this, being an early mover will also ensure that you stand out from other platforms which do not yet offer credit, and you will also lower the barrier for suppliers wanting to try a new platform.
Increased Sales and Recognition
Lastly, offering credit on your platform will empower you to intrinsically motivate your merchants to purchase more. This will ensure that your sales go up significantly, and as a result, your overall revenue increases as well.
Along with this, it is a well-known fact in the B2B space that the biggest merchants primarily trade on credit, and they are known to order large quantities with higher ticket sizes and margins. Without having a credit offering on your platform, there is no way for you to increase your recognition and capture this segment, making this one of the greatest benefits of integrating an embedded financing solution on your platform.
In Conclusion and Getting Started
Business commerce has evolved significantly over the past couple of years, and this has defined how businesses transact with each other. Today’s businesses mostly prefer transacting on credit, and thus offering this solution by being an early mover will definitely make you stand out and increase your revenue in the process.
At CrediLinq.ai, we have pioneered embedded financing solutions for platforms of today and tomorrow. Our technology stacks empower you to expertly assess your merchant’s creditworthiness and offer them seamless access to affordable credit at the click of a button. Get in touch with us to explore our solutions and offer embedded financing on your platform today.
