In 2023, SMEs made up approximately 5.55 million businesses in the UK, employing 16.7 million people – about 61% of the country's total workforce. SMEs generated £2.4 trillion in turnover, contributing significantly to the UK economy. This means SMEs are responsible for around three-fifths of private sector employment and half of its turnover, supporting key industries such as retail, hospitality, e-commerce and more. 

The strength of these businesses remains key to boosting growth, increasing employment opportunities and encouraging globalisation – all central tenants of the United Nations Sustainable Development Goals (SDGs).

In order to keep SMEs driving forward, more needs to be done to provide small players with stability through critical financial support. 

What’s holding SMEs back?

SMEs face a number of uphill battles on the journey to success. Rising costs, economic uncertainty and limited access to financing all negatively impact the trajectory of small and medium businesses. 

And the data backs this up. The Bank of England estimates an annual funding gap of £22 billion for SMEs, while the Impact Investing Institute reveals that SME loan approval rates have plummeted from 80% in 2018 to just 50% in 2023.

What’s worse is that female and minority-owned entrepreneurs face even greater struggles when it comes to accessing finance.

Immediate SME support for long-term economic gain

In the long-run, providing small business owners with equitable financial support is not just the fair approach; it is a smart economic strategy. 

According to the European Investment Bank (EIB) businesses that benefited from financing not only had 5% higher employment and 6% increased productivity following lending but were also 15% more likely to secure VC investment. 

This adds up to the trends we’re seeing internally as well, with YouLend-backed SMEs reporting a 26% uptick in sales in the six months following funding and on average, hiring one more person to work for their business. The impact we’ve seen on the UK GDP has been phenomenal as a result of SME growth, with YouLend's financing contributing an estimated £7 billion in SME revenue to the global GDP to date.

So, the impact is clear: Increased funding to SMEs drives growth for the business and the wider economy. 

The only problem now is that traditional underwriting models are making it harder for small businesses to get the funding they need. These old-school checks are biased against smaller players and create barriers like frustrating banking experiences, complicated applications, and low approval rates.

But here’s the good news: fintechs are bringing in embedded finance! They’re offering small businesses what traditional banks often can’t – speed, simplicity, and easy access to funds with flexible repayments methods tied to business performance.

Embedding Finance 

Embedded finance places funds into non-traditional channels like e-commerce and hospitality platforms – think Amazon or Deliveroo – to offer financial services to businesses at the point-of-need. What sets this model apart is its ability to use existing payments and sales data to assess a business’s financial health. Additionally, qualitative non-traditional data such as business reviews or the number of orders help paint an even more holistic picture. 

Since embedded finance integrates directly into daily apps, services, and platforms where customers already are, it helps remove the barrier to accessibility and convenience. It allows SMEs to access financing in just a few clicks, in under a few minutes.

Data reveals that embedded financing platforms are making significant strides in promoting inclusivity. For example, YouLend attracts 12% more financing applications from female-led businesses and are 2x more likely to approve funding for them compared to the UK average, thanks to its unbiased and automated decision-making models.

The statistics also highlight that over half (58%) of the capital from YouLend’s financing was directed to two of the country's most deprived regions, supporting low-income business owners. This demonstrates that embedded finance is effectively reaching the SMEs that need it most, enabling a more equitable distribution of capital.

As the embedded finance industry continues to evolve, growing data indicates that the sector is positioned to fulfil its early promises. Reports like Widening Access to Capital and other surveys offer a clear picture of the progress being made against the Sustainable Development Goals.

It's no surprise then that 38% of UK small and medium-sized businesses plan to increase their use of embedded financial services over the next 12 months. This trend suggests the industry is effectively narrowing the financing gap in the UK and Europe. Similarly, in the US, Boston Consulting Group report found that 64% of SMEs are interested in financial services embedded within platforms, highlighting the sector’s global appeal.

As more SMEs tap into embedded finance to fuel their growth and performance, the entire UK economy is in for a boost! By making it easier for underserved businesses to access capital, this sector is sparking innovation and helping drive long-term growth across the country.

For more startup news, check out the other articles on the website, and subscribe to the magazine for free. Listen to The Cereal Entrepreneur podcast for more interviews with entrepreneurs and big-hitters in the startup ecosystem.