Open banking revolutionized the financial market. It created a more accessible and interconnected ecosystem. This financial technology allows third-party developers to build services that interact with banks and other financial institutions, thus fostering competition and innovation.
More than seven million small businesses and individuals in the UK alone rely on open banking services. As this transformation unfolds, the financial industry will see a paradigm shift in B2B financing. The benefits of this movement is what continually attracts SMEs in the UK and across Europe.
4 Types of B2B Financing
A 2020 Ernst and Young study found that borrowing comprised 10% of open banking use. Consumer borrowing accounts for much of this, but SMEs’ use of B2B financial services has continued to grow. Today, a long list of B2B financing options are available to businesses, each catering to specific needs and requirements. Here are some of the most common types available.
With term loans, businesses receive a lump sum upfront, with a fixed repayment schedule and interest rate. One Forbes article reported that 32% of SME owners chose not to apply for business loans from 2020 to 2021 because of the barriers they anticipated. Consequently, term loans provide a solution for the big capital problem that many companies face.
B2B business loans allow companies to borrow working capital from and through their payment service providers using an online platform. The amounts they can borrow, and the repayment scheme is based on the historical data of card payments received. This makes it ideal for short-term cash flow needs. Repayment of the loan is based on a percentage of daily revenue, rather than some fixed amount to be paid on a monthly basis.
Businesses can receive advances based on their outstanding invoices, helping to alleviate cash flow issues. This is particularly useful for companies with long payment cycles. That flexibility opens loan opportunities for business owners who might not otherwise qualify.
Some companies have a lot of tangible assets but need cash to meet financial obligations. Financing based on a company's assets makes it possible to leverage assets, such as equipment, inventory, or real estate. This type of funding can provide a significant cash injection for businesses seeking to expand or invest in new resources or pivot in a market downturn.
Pros and Cons of B2B Financing Platforms
As B2B financing platforms become more prevalent, managers must understand their advantages and disadvantages so that they can make informed decisions. Note that different B2B fintech services have unique advantages and disadvantages, but there are some general things to remember.
Access to capital is one of the top reasons your business should look into open banking. Here are some additional reasons it should make your to-do list for this year:
- Increased competition: Open banking has led to a surge in new financial services, driving innovation and competitive business pricing. The UK government posits that open banking will reduce banking and financing costs for millions of SMEs.
- Customization: With a broader range of financing options, SMEs can find bespoke funding solutions catering to their unique requirements. Asset-based and invoiced-based financing are excellent examples of this.
- Faster solutions: SMEs no longer need to wait days or weeks to apply and get approval for a loan. The UK Gazette likened open banking financing to mere minutes of travel insurance shopping and commended the faster lending decisions.
- Enhanced data security: Open banking APIs require strict regulatory compliance, promoting more secure data-sharing practices between financial institutions and third-party providers.
- Reduced fragmentation: Open banking has enabled a seamless customer experience across multiple platforms while allowing companies to monitor various financial accounts from one dashboard.
- Attractive to young people: The new generation of consumers and business managers make up a significant portion of fintech usage. Ernst and Young found that people 25 to 44 were among the most likely to use fintech.
No solution is without its downsides or concerns. Here are some you should plan for when implementing open banking in your business model:
- Distrust: The 2020 Ernst and Young study found that 48% of consumers worry about open banking data protection and cybersecurity.
- Compliance issues: Data privacy and banking standards vary around the world, such as the GDPR in Europe versus fragmented efforts in the United States.
Choosing the Right B2B Financing Platform
Not all B2B platforms are created equal, so what should you look for in your B2B finance partners? Answer that question by following these steps:
- Identify your customers’ financing needs.
- Evaluate compatible platform features.
- Review interest rates and fees of competitors.
- Review the platform’s application process and lending criteria.
- Assess customer support.
- Read customer reviews from independent sources.
- Verify regulatory compliance across all markets served by your target customers.
At ezbob, our B2B embedded finance solutions are game-changers in the European banking industry. We make it easier for creditors to connect with the small businesses they serve. Book a demo to see how it works.