Embedded Financing 101: A Guide to Implementation and Benefits

by Kieran Daly
June 16, 2023
Embedded Financing 101: A Guide to Implementation and Benefits

As time ticks on the world of business financing becomes more accessible for business owners to utilize, especially within the B2B space. Embedded finance tools like BackdPay have made it easier for vendors to offer their customers the flexibility they need. These options have become an integral service in B2B marketplaces that provide small businesses the flexibility they need to grow while making essential purchases to scale their businesses. 

But what is embedded financing and how can offering it affect your business? Backd is here to help answer that exact question with our guide on embedded financing, as well as providing you with the chance to offer your clients the flexible financing they need.  

What is Embedded Financing?

B2B embedded finance refers to the integration of financial services and products into a business-to-business (B2B) company's existing product or service offerings. The goal of B2B embedded finance is to provide businesses with easier access to financial services, such as lending, payments, and insurance, directly within the context of their business operations.

The term "embedded" refers to the idea that financial services are integrated into a business's existing processes and workflows, rather than being a separate, standalone service. For example, a B2B company may offer a payment processing solution integrated into its platform, allowing its customers to make payments seamlessly within the context of their existing business operations.

B2B embedded finance can provide several benefits to businesses, including increased convenience, faster access to funding, improved cash flow management, and reduced administrative overhead. By integrating financial services directly into their offerings, B2B companies can provide a more comprehensive and streamlined experience for their customers, while also generating additional revenue streams from the financial services they offer.

B2B embedded finance is becoming increasingly popular as more businesses recognize the potential benefits of offering financial services to their customers. As a result, there has been a rise in the number of fintech startups and traditional financial institutions offering B2B embedded finance solutions in recent years.

Advantages of Embedded Financing

Offering embedded financing brings a multitude of benefits for businesses. First and foremost, it offers the chance for businesses to increase their revenue. By offering financial services to their customers, B2B companies can generate additional revenue streams and increase their overall profitability. 

Embedded financing also allows businesses to improve their customers' experiences. Integrating financial services into a B2B company’s existing offerings can provide a more convenient and seamless experience for customers, improving satisfaction and loyalty. This can also lead to a direct increase in customer retention, as B2B companies can retain customers who might have overwise fone to competitors who offer similar financing options. 

Business owners are also offering the chance to improve their cash flow management when offering embedded financing. B2B businesses can use financing options to manage their own cash flow, helping them to maintain stability and continue to invest in their business.

Disadvantages of Embedded Financing

Every financial product is not without its disadvantages. When considering offering embedded financing to their customers, businesses should carefully weigh their options. For instance, offering embedded financing could come with increased risk to your business as offering financing options can expose B2B companies to greater risk, particularly if your chosen option extends credit to customers. If customers default on their payments then this can negatively impact the company’s cash flow and profitability, however, this can be mitigated by utilizing a third-party integration. 

Offering embedded financing may also be subject to additional regulatory requirements and compliance obligations. This can be complex and time-consuming to manage. In addition, integrating embedded financing can be expensive, requiring investments in technology, personnel, and infrastructure.

Embedded financing can also bring with it a potential conflict of interest, especially if offering this pits you in direct competition with your customers. For example, a B2B lender may be less likely to provide financing to a customer who is competing within the same market, however, this also offers an opportunity for partnership if you partner with a lender to embed your financing for you. 

Types of Debt Financing

Trade Credit: This is when a business extends credit to another business, allowing them to purchase goods or services and pay for them later.

B2B Buy Now Pay Later (BNPL): This allows businesses to purchase goods or services and pay for them over time in installments, rather than paying the full amount upfront. This type of financing can be offered by a variety of companies, including fintech startups, traditional banks, and specialized BNPL providers.

Invoice Factoring: This is when a business sells its outstanding invoices to a third-party financing company, which then pays the business a percentage of the value of the invoices upfront, minus a fee.

Purchase Order Financing: This is when a financing company provides the funds needed to fulfill a purchase order from a customer. The financing company then collects payment from the customer and pays the business the remaining amount, minus a fee.

Supply Chain Financing: This is when a financing company provides financing to a supplier in a supply chain, allowing them to receive payment for their goods or services faster.

Equipment Financing: This is when a business finances the purchase of equipment or machinery from another business, typically through a lease or loan agreement.

Merchant Cash Advances: A business receives a lump sum of cash upfront in exchange for a percentage of its future sales. This type of financing is often used by businesses with a high volume of credit card sales.

Steps to Integrating Embedded Financing

Integrating B2B embedded finance requires careful planning and execution to ensure a smooth implementation. Here are some general steps to consider:

  1. Define your business needs: Determine what financial services you need to offer your customers, such as lending, payment processing, or insurance. Consider what your customers will expect from your embedded finance offerings and the potential benefits to your business.

  2. Choose a partner: Find a financial services provider that can offer the products and services you need. Look for a partner that has experience working with businesses like yours and can provide the level of support you require.

  3. Integration planning: Develop a detailed plan for integrating the financial services into your existing systems. This should include identifying the necessary APIs and data formats, as well as any custom development that may be required.

  4. Technical integration: Work with your partner to integrate financial services into your systems. This may involve developing custom software or using pre-built integrations provided by the partner.

  5. Testing and validation: Thoroughly test the integration to ensure that it works as expected and that data is being transmitted securely. Validate the financial services provided by the partner to ensure that they meet your business needs.

  6. Launch and ongoing maintenance: Once the integration is complete and tested, launch the new financial services to your customers. Monitor performance and make any necessary updates or maintenance to ensure continued success.

Overall, integrating B2B embedded finance requires careful planning, technical expertise, and collaboration with a financial services provider. By following these steps and working closely with your partner, you can successfully add valuable financial services to your business offerings.

Embedded Financing: Key Terms to Know

The terms associated with embedded financing will vary depending on the type of financing that you decide to offer, in addition to the lender that you decide to work with. However, some common terms that are associated with embedded financing may include:

APIs (Application Programming Interfaces): These are tools that allow different software applications to communicate and share data with each other. APIs are crucial for integrating financial services into existing business systems.

Fintech (Financial Technology): This refers to the use of technology to provide financial services. Fintech companies often specialize in providing innovative financial products and services using digital platforms.

Payment Processing: This involves the handling of electronic transactions, such as credit card payments, online transfers, or mobile payments. Payment processing is a crucial aspect of many embedded finance solutions.

Lending: This refers to the provision of funds to an individual or business in exchange for repayment with interest. Embedded lending solutions can help businesses provide financing to their customers.

Risk Management: This involves identifying and mitigating potential risks associated with financial services, such as fraud or credit risk. Effective risk management is essential for offering secure and reliable embedded finance solutions.

Compliance: This refers to adherence to regulatory requirements and guidelines related to financial services. Compliance is important for ensuring that embedded finance solutions meet legal and ethical standards.

Understanding these key terms related to B2B embedded financing can help business owners make informed decisions about their financial services offerings and ensure the successful integration of these services into their existing systems.

Is Embedded Financing the Solution For Your Business?

When it comes to implementing an embedded financing solution into your business there are several key decisions that need to be made. The most important of which is how much will it cost your business directly compared to how much additional income it could potentially generate. 

At the heart of this decision is also determining the best-embedded finance solution for you, for instance, providing your customers with B2B Buy Now, Pay Later may help your customers who wish to purchase multiple big ticket items at once instead of spreading out purchases over time to conserve their capital. 

Embedded Financing with Backd: BackdPay

At Backd, we understand that the need for embedding financing is a reality for many business owners. We were founded on the principle of being there to support small businesses and it is what continues to drive us. This is why we’ve created a new B2B Buy Now, Pay Later product catered to the B2B market, BackdPay. 

Do you want to increase your sales while providing embedded financing to your clients? Then consider offering BackdPay to your customers. BackdPay provides you with the chance to grow your customer base by 30% while getting paid instantly. 

Backd offers competitive rates in the B2B Buy Now, Pay Later with terms of 3, 6, or 12 months with no cost for offering or integrating this financing option. Whether you’re looking to hold onto your capital or a vendor looking to offer your customers the flexibility that BackdPay can bring to your business, don’t wait to take advantage of it. Find out more today about how you can provide your customers with financial flexibility with Backd.

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