The future of SMB embedded lending: 7 key concepts that drive lending forward

Hey Fintech Friends!

ICYMI, I wanted to share the most recent Fireside Chat in our embedded lending series. This one was with Lizzy Handsman , VP of Operations at Prime Financial Technologies , and a key partner in making embedded lending more accessible.

Lizzy’s background in small business lending goes back to her childhood. She grew up with an entrepreneur father and a mother who worked in SMB banking. Terms like “collateral” and “cost of goods sold” were commonplace in dinner conversations. While she didn’t realize it back then, these conversations heavily influenced her career.?

Before Prime, Lizzy spent 7 years at Square , most recently leading global operations at Square Banking, where she focused on small business lending. Now, she's helping the team build a full-stack infrastructure that enables merchant-facing platforms to create lending programs for SMBs.

In this fireside chat, we discuss the current and future direction of small business lending, where embedded lending fits in, why operations are so important for success, and more.

For those of you who prefer to read rather than watch (or maybe you like both), below are seven main takeaways from the conversation. We discussed the state of embedded lending, how lenders can best serve small businesses, and what key ingredients matter most to creating a successful SMB lending business in the modern market.?

1. Vertical SaaS integrations are the future

Within different small business industries, lending customers are on vertical SaaS platforms the most. Platforms that serve industries like restaurants, e-commerce, or logistics are deeply integrated into small business owners' daily lives. As a result, this is where those same business owners are likely to turn for their working capital needs.

Lenders who can serve the unique needs of a specific industry should identify and integrate with vertical SaaS platforms that are most deeply integrated with their customers. This will help them best serve their industries and find the right lending customers at the right time.

2. Alternative data sources are key to leveraging AI

AI and machine learning are useful in automated loan underwriting and servicing, but only when vast data is available and leveraged properly. Alternative data sources, such as a business’s cash flow, can feed AI algorithms to open up new possibilities in the underwriting process, including new loan types and better rates. At the same time, data collection needs to be streamlined. Otherwise, lenders risk pushing customers away.

The same is true for the servicing process, where more data can be collected to create AI-based predictive analytics algorithms. These algorithms can create an “intelligent servicing” system in which lenders can proactively contact customers ahead of time when they might default or possibly need a new loan. This can prevent defaults and help drum up more lending business.

3. Proactive communication is essential during servicing

Data can create predictive insights during loan servicing, and the best way to act on those insights is through proactive communication. If a borrower is at risk of defaulting, proactively reach out to offer an alternative payment schedule. If a borrower is likely to qualify for a higher credit limit or need another loan, proactively communicate the offer you’re willing to make.

Proactive communication is especially important when addressing payment problems and helps lenders avoid ineffective cold calling and debt collection.?

4. Embedded lenders should make borrowing simpler and easier for SMBs

Financial literacy is not necessarily a strong suit for small business owners. A restauranteur, for example, might not know about the difference between a working capital loan or a merchant cash advance, but what they do know is if they need more capital to keep their business running.?

Embedded lenders can reduce the complexity and anxiety of borrowing by making lending simple for small business owners. They can teach financial literacy, but what really matters is making it quick and easy for busy business owners to get the loans they need.?

5. One-size-fits-all lending experiences don’t work

Lenders who work within different small business verticals can’t expect success from a one-size-fits-all customer experience. A cafe owner will not have the same capital needs as an auto dealership or a print shop.?

Embedded lenders, especially those integrated with Vertical SaaS, must adjust customer experiences and lending products to meet the industries they serve.?

6. Credit risk management is a key source of innovation

Traditional underwriting created a one-size-fits-all way of managing a business’s risk. However, that doesn’t work when serving different SMB verticals, such as restaurants or construction. Lenders can create innovative solutions to serve the unique needs of these different risk profiles across different industries.?

Embedded lenders are often closely aligned with specific industries. As such, they’re in a good spot to tailor unique and innovative loan programs that deploy just the right amount of risk while ensuring an appropriate amount of debt. Flexible risk management that considers unique factors like seasonality, community changes, and individual business circumstances can help lenders create better loan products and make more informed decisions.?

7. Operations are critical for customer experience

An excellent front-end experience can only exist with a streamlined backend.

Lizzy is an operations expert at heart and knows that strong operations are critical for a seamless customer experience. Ops leaders are the voice of the customer for the backend and should advocate for process improvements and efficient solutions that better serve customer needs.

Conclusion: Uniquely serving your vertical is the top priority

To sum up, the future of embedded lending is bright, but lenders must shift their approach to focus more singularly on customer needs within the verticals they serve.

While more data, streamlined operations, smarter underwriting, innovative risk management, and proactive communication are all important, true success will come from understanding the unique needs of different industries and tailoring lending experiences accordingly.

Which of the seven concepts do you think will have the biggest impact on the future of SMB embedded lending, and how do you see it shaping the lending landscape in the next 5 years?

Until Next Time, ??

Matt Bivons , CEO and Founder at Canopy