Exploring the benefits of embedded lending: What it is and how it helps SMBs and software platforms

Why embedded lending is reshaping SMB finance

Embedded lending is revolutionizing the way SaaS companies serve their customers, with the embedded finance market projected to reach a staggering $7 trillion valuation by 2030.

In this article, we’ll explore the benefits of embedded lending and its future impact on banking. Before we get into that, let’s go over some of the basics.

What is embedded lending?

Embedded lending is transforming how businesses access credit—integrating loans directly into SaaS, e-commerce, and payments platforms to streamline financing at the point of need. Embedded lending opens doors for companies that aren't traditional financial institutions to meet their customers' desire for easy and frictionless lending experiences without having to leave the platform they're using.

Embedded lending fundamentally changes the lending process by removing traditional barriers. Small business owners no longer have to make a mad dash to the bank when they need a loan. Instead, they can seamlessly access capital right on the platform they use to process payments or manage operations.

How does embedded lending work?

Embedded lending seamlessly integrates financing into platforms like SaaS, e-commerce, and payment processing systems, allowing businesses to access credit without leaving their workflow. Unlike traditional lending, where companies must apply separately through banks or third-party lenders, embedded lending is fast, data-driven, and often pre-approved.

While Pipe is not a lender (we offer an advance not a loan), Pipe Capital is a great model for how simple embedded capital access can be for small businesses.

Here’s a step-by-step breakdown of how it works:

Pre-Qualification & Offer Generation

• A business using a SaaS platform, payment processor, or marketplace becomes eligible for funding based on its transaction history through the platform.

• Pipe's system analyzes live financial data to assess eligibility.

• A capital offers appear directly within the platform dashboard (pre-approved in most cased), tailored to the business.

Example: A gym owner sees a capital offer inside its gym management software, based on membership revenue trends—without applying separately at a bank.

Application & Instant Decisioning

• If the business owner accepts the offer, it takes just a few clicks to request the advance and confirm a few details for compliance purposes.

• Unlike traditional loans requiring manual underwriting, Pipe 's automated underwriting is based on real-time revenue analytics.

• This not only means a much faster process and automatic evaluation for future offers, it also allows offer approval to be fully assessed, eliminating the need for extra checks that could result in a drop off between pre-qualification and final approval.

• Once approved, funds are deposited quickly—typically 1-2 days, depending on your bank's holding policies.

Example: A restaurant processing payments through a SaaS-based POS system gets a capital offer. They've already been pre-approved, so there's no need for an application, just confirming ownership and accepting the offer.

Automated Payments Aligned with Revenue

• Instead of fixed loan repayments, Pipe's payments are based on a percentage of your incoming transactions, so they flex with your cash flow automatically.

• If sales slow down, so do payments—helping businesses manage cash flow during seasonal dips.

• No late fees, no compounding interest—just transparent, performance-based payment.

Example: A salon accepts capital, but sales are slow the following month. Instead of ending up in a bind, their payments drop to match their current revenue.

Growth Without Traditional Loan Barriers

• Embedded solutions like Pipe provide access to funding without the headaches of traditional business loans:
  No collateral requirements
  No long approval wait times
  No fixed monthly debt obligations

By leveraging real-time data instead of outdated credit models, embedded lending gives SMBs the capital they need—when and where they need it.

Why It Matters

Embedded lending isn’t just an alternative to bank loans—it’s a smarter, faster, and more aligned way for businesses to fund growth. By integrating financing into everyday business tools, platforms offering embedded lending increase their Gross Payment Volume (GPV), improve customer retention, and unlock new revenue streams.

For software platforms:

• Higher merchant retention & lower churn

• New financial services revenue streams

• Increased platform stickiness (businesses stay longer when financing is built-in)

For businesses & entrepreneurs:

• Faster, fairer access to growth capital

• No disruption to existing workflows

• More flexibility than traditional loans

This is why embedded lending is becoming the new standard in fintech.

The role of technology in embedded lending

Technology plays a central role in the success of embedded lending. Let's take a closer look at the role of technology in embedded lending.

Seamless Integration: Technology enables the seamless integration of lending services into non-financial platforms, such as e-commerce websites, payment systems, or mobile apps. Through well-designed Application Program Interfaces (APIs), financial institutions and Fintechs can connect with these platforms, making the lending process accessible within the user's existing digital environment without compromising security.

Data Analysis: Advanced data analytics and machine learning algorithms are used to assess a borrower's creditworthiness. By analyzing a wide range of data points, technology allows lenders to make fair and accurate lending decisions. This benefits companies with limited credit history or business models that may have been underserved by traditional lending practices.

Real-Time Processing: Technology enables real-time processing of loan applications and approvals. Borrowers can receive decisions within seconds or minutes, significantly reducing the time and effort required to secure a loan. This speed is a hallmark of embedded lending, making it a highly attractive option for customers.

Security and Compliance: Robust technology ensures the security of sensitive financial information and compliance with data protection regulations. It's essential to maintain the trust of customers and adhere to privacy requirements, and technology plays a crucial role in achieving this.

User Experience: User-friendly interfaces and mobile applications provide a smooth and user-centric experience. Borrowers can easily apply for loans, track their applications, and access funds. This level of convenience is made possible through advanced technology design and development.

Scalability: Technology allows embedded lending to scale efficiently. Financial institutions and lenders can extend their services to a wide range of non-financial platforms and reach a broader audience. This scalability is essential for the growth and adoption of embedded lending.

Automation: Automation is a key feature of embedded lending. It streamlines the loan application and approval processes, reducing the need for manual intervention. Borrowers can often receive near-instant approvals, and the entire process is more efficient.

Technology empowers embedded lending to be agile, data-driven, secure, and user-friendly. It removes many of the barriers that traditionally limited access to credit and enhances the overall lending experience for consumers and businesses alike.

Advantages of embedded lending

The rise of embedded lending offers numerous benefits to both borrowers and lenders. Let's explore some of these advantages:

1. Enhanced customer experience

As we already explained, embedded lending simplifies and enhances the borrowing experience by allowing users to access credit seamlessly within platforms they already frequent. This eliminates the need to navigate through various websites or apps, making the entire process user-friendly and convenient.

2. Streamlined operations and efficiency

Lenders benefit from embedded lending as it reduces the burden of extensive paperwork and manual processing. The integration of technology allows for automation, reducing the time and effort required in loan origination and servicing. This streamlined approach increases operational efficiency, leading to quicker loan approvals and automated disbursements.

3. Financial inclusion and accessibility

Embedded lending is a game-changer for financial inclusion. It widens access to credit for a broader spectrum of individuals and businesses. Traditional lending models often overlook those with limited credit histories or unconventional business models. Embedded lending platforms leverage alternative data sources to evaluate creditworthiness, making loans available to individuals who may have previously been denied.

4. Risk mitigation 

Embedded lending platforms often use advanced data analytics and risk assessment techniques to evaluate potential borrowers. This can result in more fair and accurate risk assessments and lower default rates for lenders, ultimately reducing financial risk.

5. Diversified revenue streams

For businesses, integrating embedded lending can create new revenue streams. Whether it's a retailer offering point-of-sale financing or an e-commerce platform partnering with lending providers, it diversifies income sources beyond the core business.

6. Competitive edge

Offering embedded lending can be a significant competitive advantage for businesses, especially in crowded markets. It can attract and retain customers who value the convenience of accessing credit within their existing platforms, setting a company apart from competitors.

Risks and challenges in embedded lending

While embedded lending offers numerous benefits, it presents its fair share of risks and challenges. Let's explore some of the key concerns:

1. Regulatory challenges

When lending services become part of non-financial platforms, it brings up some important regulatory issues. Financial authorities have a role in making sure that consumer rights are protected and that lending practices remain fair. Regulations must be updated to handle potential risks and ensure the financial system's stability.

2. Data privacy and security

Embedded lending relies heavily on data. This does raise concerns about the privacy and security of that information. To safeguard sensitive business data, embedded lending platforms need to take strong security measures and follow strict data protection rules.

3. Credit risk

One thing lenders need to keep an eye on is credit risk. Since embedded lending often considers borrowers with limited credit histories, there's a potential for risk that some loans might not get repaid. Smart risk assessment models can help lenders manage this challenge effectively, reducing the risk and potentially even bringing it below traditional lending levels. This is why it's key to use underwriting models tailored to small businesses and even specific industries, in order to optimize outcomes and minimize risk.

4. Fraud and identity theft

With all the personal and financial data exchanged on these platforms, there's an increased risk of fraud and identity theft. Lenders have to make sure they have strong identity verification and fraud prevention measures in place to protect both their customers and their own businesses. AI is providing powerful solutions to help automate and streamline fraud and identity checks and reduce associated risks.

The future of embedded lending

The future of embedded lending holds exciting possibilities and is likely to influence traditional banking significantly. Here are some emerging trends to watch:

• AI and machine learning: Advanced AI and machine learning algorithms are being used to assess credit risk more accurately. By analyzing vast sets of data, these technologies can provide personalized lending solutions and expand access to credit for underserved populations.

• Regulatory adaptation: Governments and regulatory bodies are adapting to the rise of embedded lending. New regulatory frameworks and consumer protection guidelines are being developed to ensure the safety and fairness of these financial services.

• Partnerships and collaboration: Financial institutions and fintech companies are increasingly forming partnerships to offer embedded lending solutions. This collaboration enables traditional banks to tap into the innovation of fintech while providing fintech firms with access to a broader customer base and more access to capital.

Conclusion 

Embedded lending is poised to revolutionize banking and lending. The future of embedded lending promises a financial ecosystem characterized by increased accessibility, efficiency, and innovative solutions, benefiting both merchants and the industry as a whole.

While Pipe is not a lender, our revenue advance allows small- and medium-sized businesses to access capital embedded in the software platforms they use every day to run their businesses. By analyzing secure, live transaction data, Pipe creates custom capital offers based on the health of the business and its revenue streams. Whether you’re looking for growth capital or looking for an embedded capital solution for your customer, you can learn more about Pipe here.