Embedded Finance: Software Companies, the New Community Banks?

Small businesses often struggle to access the capital they need to operate and grow. In the past, they relied heavily on relationships with local banks, credit unions, or Community Development Financial Institutions (CDFIs). However, these smaller community banks have faced significant challenges in recent years, leaving small businesses without the financial support they need. This is where embedded finance comes in. Embedded finance connects businesses or consumers to financial services through non-financial platforms, and software companies are quickly becoming the new community banks for small businesses. Software platforms, particularly vertical software platforms, have become the hub for small business owners to run their businesses and access the support they need. Unlike traditional banks, these platforms have deep industry knowledge and transaction data, allowing them to underwrite small business loans with reasonable risk levels. With the help of fintech partners, these platforms can offer tailored financing solutions that cater to the unique needs of small businesses in specific industries. Additionally, embedded finance allows business owners to access capital seamlessly within their existing software platforms, eliminating the need to go to traditional financial institutions. As more software platforms adopt embedded finance, the options for small businesses to access funds increase, giving them the resources they need to thrive.