Fintech
Leveraging data to equitably provide revenue-based financing to merchants in need
The lack of accessible financing poses a threat to small businesses globally, as many companies struggle to access the funds they need when they need it.
Because integrated financial services providers partner with the platforms that small businesses already use and can access their data, they can gain a complete understanding of a company’s revenue and pre-approve SME financing, eliminating the fear of rejection , suggest Rob Straathof, CEO of integrated finance provider Free.
Small businesses form the foundation of most of the world’s economies, but they have long struggled to obtain the financing they need to expand their operations, or even just to stay afloat in today’s volatile economic climate.
According to recent data from British Chambers of Commerce (BCC), for example, half of UK SMEs struggle to access finance. Additionally, 70% have not attempted to access finance from an external provider in the last 12 months – this is often seen as too big of a hurdle to try to jump.
In recent years, many banks have abandoned lending to small businesses, arguing they are too risky. Figures from UK Finance showed that gross lending to SMEs fell 22% to £14.3bn in 2023 from £18.4bn in 2022. The group blamed “uncertainty over demand, higher interest rates and the impact of borrowing during the pandemic”.
Openness to alternative sources
This doesn’t need to be the case. Thanks to fintech innovators, numerous alternative financing sources are now available on the market.
Revenue-based finance, for example, is one of the most valuable and affordable financing options currently available to small businesses. This is an alternative form of financing that allows merchants to access financing based solely on their overall business revenue.
Unfortunately, most merchants are unaware of the benefits, with 83 percent of customers not knowing what revenue-based finance is, according to our data. This is because they have become almost pre-programmed to only explore traditional forms of finance, such as equity debt or term loans. While these may be more familiar forms of business finance, they are not necessarily the most suitable options or the ones that align with the company’s goals.
Revenue-based finance has been around in some form for decades. Historically, it has been used predominantly by the oil and gas, pharmaceutical and film production industries, all of which have made good use of its flexible terms.
Revenue-based finance has become more widely used in recent years, offering more merchants a financing path without the constraints of debt or equity dilution. It helps small businesses around the world fund their marketing efforts, fuel overseas expansion, or simply solve cash flow problems.
Use data to redress the balance of equity
Revenue-based finance has become a more attractive source of financing in the era of integrated finance and open banking.
Small businesses are moving away from traditional banking and toward more integrated financial services that have been seamlessly integrated into their favorite marketplaces and platforms, whether they are like Amazon or social media giants like Facebook AND Italian:
With more and more merchants looking for innovative financial solutions that meet their needs where they are, the global integrated finance industry is booming and is expected to impact almost 2 trillion dollars by 2028. Additionally, because integrated financial services providers partner with the marketplaces and platforms that small businesses already use and can access their data, they can quickly gain a complete understanding of merchant revenue and pre-approve financing, eliminating the fear of a refusal.
This is one of the key benefits of the data-rich open banking environment. It allows fintech providers to holistically analyze a merchant’s revenue models so they can provide a tailored financing solution that sees them pay back just a percentage of their earnings, when they earn. This fairer and more efficient financing process contrasts with traditional financing methods which are often slow and inflexible.
Unlock a range of benefits
Revenue-based finance offers merchants a number of clear advantages.
First of all, it’s fast.
Typically, they can apply in minutes and receive funding within 24 hours. Most providers will run a due diligence process to determine if they are eligible or not and communicate their decision quickly.
Financing is typically provided through the merchant’s relationship with the technology they already use and trust, whether it’s an e-commerce platform or even accounting technology. The revenue-based financing provider would typically partner with such platforms, providing them access to anonymized merchant data. Depending on sales metrics, the financing provider may offer additional tranches of capital as they grow, rather than via a lump sum.
Secondly, it is flexible.
If revenue slows, so will repayments, extending the repayment period. Loan repayment is typically set at a fixed percentage of daily or monthly revenue, plus any fees on the amount advanced. This payment structure allows merchants to better absorb revenue fluctuations, and there are usually no specific payment dates or late fees.
So, unlike traditional financing, they don’t have to worry about coming up with money in time for their monthly repayment dates. And because payments are a percentage of revenue, merchants will pay more during their busiest months and less during their slowest months. This is especially helpful for seasonal businesses, like those in the hospitality industry.
Third, revenue-based finance is less risky.
There is no requirement to give up any capital or control to outside investors, nor are there stressful personal guarantees. Instead, financing is provided more cleanly based on the overall health and prospects of a company.
Finally, it’s much more transparent, something small business owners have been clamoring for during a tough cost-of-living crisis. They know what they’ll have to pay to repay the loan, and there are no hidden fees or nasty surprises.
Revenue-based finance is a perfect example of the power of open banking in action. It opens up new avenues for small business owners to secure essential funding, while simplifying the process so they can focus on their core operations. It helps fintech providers offer new financing solutions to small businesses that not only need them, but deserve the opportunity to grow.