You’d be forgiven for assuming basic human rights have nothing to do with financial services – but you’d be wrong. Article 3 of the United Nations Universal Declaration of Human Rights states that “everyone has the right to life, liberty and the security of person.” Without access to basic financial services, liberty and security are likely to remain perilously out of reach. This ability to access affordable financial products and services that meet individuals’ and businesses needs is known as ‘financial inclusion’. 

Unfortunately, micro-entrepreneurs and small businesses across the world face an all-too-common existential threat: limited access to responsible and sustainable finance. This financial exclusion is caused by several crippling factors – from being underserved by legacy providers to low levels of financial literacy.  

According to the World Trade Organisation, small and medium enterprises (SMEs) make up over 90% of businesses and 60-70% of employment worldwide. Despite the vital role they play in economies globally, many struggle to access the funding they need to first survive and then grow. For example, the annual growth rate of borrowing by UK-based SMEs fell to -5.1% in 2022, a new low. 

This common scenario is symptomatic of traditional banks’ rigid lending frameworks, which reinforce erroneous assumptions that SMEs are too risky to engage with – depriving them of the capital they need to thrive. Conversely, larger businesses are generally seen as less of a risk because they typically have more assets to underwrite loans.  

The banks’ myopic view of SMEs is formulated using antiquated criteria and assumptions that fail to consider the current and – crucially – the future business situation: 

• They lack formalised governance processes 
• They lack publicly available information 
• They often operate in emerging sectors  
• They often have insufficient assets to be used as collateral 
• They produce low credit scores 

These funding barriers are exacerbated by the banks’ cumbersome client support infrastructure and convoluted application and assessment processes. Even if a loan is eventually authorised amid these time constraints, it might be too late for an SME that has a time-critical capital requirement.  

Financial literacy – the knowledge and skills needed to make important financial decisions – is typically viewed through the lens of the individual. But small business owners must also sharpen their financial skillset to survive and thrive. As businesses attempt to scale, their financing needs alter. Understanding and navigating the funding options available can be challenging for SMEs who are entering uncharted territory. A lack of knowledge or availability of the most suitable funding options deters them from applying or can be costly if the incorrect product is selected. For example, whether to use loans or equity and whether to borrow for the short or long term. 

The funding mountain is even higher for female entrepreneurs. For example, women in the UK launch businesses with 53% less capital on average than men. Why? According to Credit Suisse, they are less aware of different funding options and less willing to take on debt throughout the business life cycle. Faced with these hurdles, female-led businesses may lack the impetus needed to grow and may be more vulnerable to an economic downturn.  

Why inclusive finance matters for small businesses

It doesn’t matter what stage of their lifecycle they’re at – from starting up to embarking on growth – the lifeblood of any SME is the same: capital. Unlike large businesses, their pockets aren’t deep. This lack of financial reserves brings financial inclusion into sharp focus for SME owners.  

Capital requirements represent a significant barrier to entry for many people planning to start a new business. Obtaining a business loan or other form of start-up funding is often easier said than done. Many businesses ideas fail to get off the ground because it appears too risky for lenders, or the loan applicant has poor credit. Without funding, people who don’t have personal savings to dip into or a ‘Bank of Family’ to assist can’t fulfil their ambitions. 

Once established, SMEs typically require additional funding to achieve financial security and scale the business. This injection of capital can help them manage several vital requirements: short-term cash flow, re-balancing the mix of short-term and long-term debt, replacing expiring finance facilities, or funding the growth of the business. 

Financial access helps SMEs plan for everything from long-term goals to unexpected emergencies and an economic downturn. Take the current UK economic landscape, for example, which is littered with significant challenges for SMEs – from decades-high inflation to a recession. Access to additional funding provides a financial safety net for SMEs during this turbulent period, helping them to pay bills, avoid redundancies, and cover debt.   

Financial inclusion in 2023

SMEs must contend with many variables that are beyond their control – not least the health of the domestic economy. If we were to take the UK economy’s current temperature it would be worryingly hot. Not only did UK inflation hit a 41-year high in October, accelerating to 11.1%, the economy has recently entered a recession that’s expected to last until summer 2023 – testing conditions that are likely to squeeze businesses finances. This is being compounded by Bank of England interest rate hikes in a bid to cool red-hot inflation, making it more difficult for SMEs to repay existing loans.  

SMEs that experience barriers to financial inclusion over the coming months might lack the finances needed to weather the economic storm.  

How embedded finance is improving financial inclusion

SMEs have been thrown a financial lifeline by the emergence of embedded finance: the seamless integration of financial services by non-banks into their infrastructure. By partnering with embedded finance providers like Liberis, platforms, ISO/PSP providers, SaaS providers, and acquirers can offer their business customers access to vital finance that helps to address the financial inclusion challenges they face. Known as embedded lending, this subset of the wider distributed approach to providing financial services eliminates the need to rely on high-cost third parties – typically a bank – in the lending process. 

Within this lending revolution, an alternative funding option has become available to SMEs that can unlock capital quickly and cost-effectively: revenue-based financing. This allows SMEs to access funding based solely on their overall business revenue, using transaction data, not historic credit scores as is the case with traditional forms of finance like loans – and the benefits are compelling: 

• The application process is primarily conducted online with a few clicks, and a decision is made within minutes. 
• In most cases businesses don’t need to provide personal guarantees or assets to access funds.  
• Don’t need to meet set repayment dates each month. 
• Funding is authorised based on the overall financial performance of the business. 
• Repayments are made with confidence, with the business generating the revenue needed from each customer transaction. 

A quick look at the World Bank’s definition of financial inclusion underscores how embedded finance epitomises everything it aims to achieve: “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.” As the number of useful and affordable products launched by non-financial services companies continues to grow, SMEs are turning their backs on traditional providers and embracing the modern inclusive model.  

Help close the funding gap by partnering with Liberis

If you are interested in helping your customers access the finance they need to grow, get in touch with the team to discuss our partnership opportunities.