Embedded credit solutions represent a significant advancement in financial innovation, transforming how micro, small, and medium enterprises (MSMEs) access credit and manage their financing needs. By embedding lending capabilities directly into existing non-financial platforms, such as e-commerce platforms, accounting software, or payment gateways, embedded credit enables enterprises to source financing much as they procure other operational goods/services within their existing operational ecosystems.
This removes many of the barriers associated with traditional credit requirements, such as extensive paperwork, the need for collateral, and long approval delays. With embedded credit, lenders utilise real-time business financial data, such as sales and cash flow metrics, to more quickly and credibly assess loan applications relative to actual enterprise circumstances and cash flow capabilities. In addition to facilitating access to capital, embedded credit solutions advance and improve financial inclusion by funding enterprises that may otherwise be overlooked by traditional lenders or capital providers, including women-owned and rural businesses.
What is Embedded Credit for MSMEs?
Embedded finance refers to the integration of financial services, such as payments, lending, and insurance, into non-financial digital platforms or workflows. When this concept extends to credit - meaning lending, working capital, and invoice financing- it's made available at the point of a business transaction or within a platform workflow, it's referred to as embedded credit for micro, small, and medium enterprises (MSMEs).
As one industry article states:
“Embedded finance and OCEN democratize credit products for MSMEs … These solutions cater to MSMEs’ needs for flexible repayment terms, small loans, and frequent access to credit, overcoming barriers such as high costs and lengthy underwriting processes.”
In simpler terms, when a small business is already using a digital procurement system, marketplace, B2B platform, or ERP, and it has access to credit (such as a loan or advance) within that same workflow- without needing to navigate to a bank portal- this is known as embedded credit.
Typical use cases for MSMEs
Here are some examples of how embedded credit appears for MSMEs:
- In a B2B e-commerce marketplace: When an MSME orders raw material, at checkout, there is an option to say “Credit Now, Pay in 30 Days”, funded through the platform and using the platform’s transaction history.
- On a procurement/supply-chain platform: It is immediately possible to discount or advance vendor invoices generated by the platform without switching to another financing platform.
- In a payments/POS aggregator: Small merchants receive a line of credit function integrated into their POS system to anticipate festival demand, without needing to switch to another financing platform.
- In a SaaS or digital services platform for MSMEs: The SaaS platform provides subscriptions, equipment, or service offerings, with financing bundled with the product.
- Supply‐chain deep-tiered: Even tier-2/3 suppliers to large enterprises have the option for early payment or working capital access to finance via the ecosystem of the anchor organisation.
The Role of Embedded Credit Solutions
Embedded credit solutions are changing the landscape of MSME financing by granting loans in tandem with the platforms businesses use every day.
- Improved Access to Credit: Lenders can instantly evaluate a creditworthy borrower using real-time business data such as transactions, inventory, and cash flow, while greatly reducing the number of documents and/or collateral required.
- Convenient and Continuous Flow of Funds: Loans can be offered through platforms such as e-commerce websites, payment gateways, and accounting software, within a given MSME's ecosystem. This allows the business to be funded while continuing its operations without time delays associated with the banking process.
- Reduces Time and Financial Frictions: Embedded lending processes reduce the steps required for complex bank financing, adding efficiency and reducing friction in getting funds to the borrower at the point of sale or service.
- Increased Expansion of Financial Inclusion: Alternative data analytics enable businesses without traditional credit histories to borrow by expanding the range of data used to evaluate borrower risk.
- Improvement in Operations: Integrating finance, sales, and operations into a single service provider and, subsequently, a single digital platform increases operational efficiency, allowing MSMEs to grow cost-effectively and sustainably.
How Embedded Credit Can Drive Growth in MSMEs?
Embedded credit can empower MSMEs by making the credit experience faster, smarter, and more inclusive. Here are the main benefits of embedded credit:
- Speed and frictionless access
Using digital data, APIs, and automated workflows, the time to loan approval is reduced from several days to several hours, allowing MSMEs to seize new opportunities immediately. - Contextual and right-sized credit
Credit embedded in workflows is not a large, generic term loan, but rather small, customised, short-term financing that fits an MSME's cash flow cycle and needs. - Smarter risk assessment
Platforms can provide lenders with real-time data- transaction history, invoice data, and historical orders that allow lenders to assess credit far more accurately and expand the credit footprint to thin-file MSMEs. - Deeper tier supply chain financing
Even smaller vendors and suppliers can participate and gain access to liquidity through the supply chain. - Growth enabler
Embedded credit is seamlessly integrated, enabling an MSME to improve inventory management and turnover and scale their business. - Drives financial inclusion
Embedded credit encourages digitalization and formalization, thereby increasing access to structured finance opportunities and government benefits associated with such systems.
Challenges of MSME Growth with Embedded Credit Solutions
- Access to Credit: Another persistent challenge is the credit gap. Only ₹34 lakh crore is financed by banks and NBFCs out of India's overall MSME finance demand of ₹123 lakh crore, leaving ₹30 lakh crore completely unaddressed. The absence of collateral, formal documentation, and credit history prevents many MSMEs from obtaining institutional loans. Unregistered businesses often resort to borrowing from informal credit sources that charge higher interest rates, which do not support sustainable growth.
- Technology Adoption: Technology adoption is progressing rapidly, yet many MSMEs do not adopt or engage with the technologies that drive growth. Limited awareness, a tendency towards record books (bahi khata), and limited exposure to multiple digital interfaces are preventing MSMEs from using fintech platforms.
- Financial Literacy: A lack of understanding of credit scores, loan products, and the impact of repayment behaviour often leads to poor financial decisions or missed funding opportunities.
- Regulatory and Institutional Barriers: The lack of a single MSME registry and the diversity of enterprise forms make it difficult for lenders to offer customised products. A cookie-cutter approach does not address the specific needs of the sector and widens the financing and operational gap for India's MSME ecosystem.
Case Studies: Successful Implementations of Embedded Credit Solutions
Embedded credit solutions have reshaped MSME financing by merging lending with digital ecosystems.
- E-commerce Platforms: Hepsiburada and Mercado Libre offer working capital loans based on merchants' sales data, enabling access to credit without collateral or lengthy documentation.
- Fintech Innovations: Shopify Balance integrates banking services, debit cards, and rewards into its platform. Additionally, Afterpay and Klarna offer Buy Now, Pay Later (BNPL) options that help alleviate financial pressure for small sellers and consumers.
- Alternative Data Use: Fintech companies like OPL utilise transaction and payment data to evaluate creditworthiness, empowering first-time borrowers who lack traditional credit histories.
- Integrated Operations: Business management platforms now include direct loan access, enabling enterprises to make smarter financial decisions through real-time insights.
- Bank-Fintech Collaborations: Regional banks are collaborating with fintech companies to integrate lending into digital platforms, ensuring continuous customer engagement and creating new revenue streams.
Future Trends in the Growth of Embedded Finance
The embedded finance sector is poised for significant expansion, reshaping how MSMEs access and use financial services. As digital transformation accelerates, businesses increasingly prefer seamless, integrated financial experiences. Embedded finance is evolving from a trend to a foundational element of modern business models, bridging the gap between traditional finance and day-to-day business operations.
- Improved Access to Credit
A significant change is ensuring enhanced access to credit for MSMEs through data-driven approaches. Alternative data (transaction data, sales data, supply chain flows, etc.) enables lenders, with the help of embedded finance, to develop unique, faster, and more equitable credit solutions. This also helps with the onboarding process and enables unbanked or underbanked MSMEs to access timely financing. - Regulatory Developments
As adoption increases, regulatory models are evolving, often requiring transparency, compliance, and consumer protection. Continued cooperation between banks, fintechs, and regulators will be essential to keeping this ecosystem secure, promoting good practices, and shifting toward standardised practices. - Utilisation of Emerging Technologies
In the future, we will see deeper integration with AI and machine learning to automate credit assessment and improve alternative scoring models. The level of power given to lenders to act on this data has the potential to lead to better real-time decisions and faster turnaround times. - Expansion into New Sectors
In addition to lending and payments, embedded finance will continue to expand into areas such as insurance, tax, and accounting, unlocking new opportunities and enabling greater financial inclusion for MSMEs and across industries.
Conclusion
Embedded credit solutions are redefining how MSMEs assess, understand and access finance by embedding credit into the core of their everyday operation when they are transacting, purchasing, invoicing, or restocking. It allows for more timely access to capital, reduces friction, and better aligns with their cash flow and growth opportunities.
For platforms and lenders, new growth pathways are created, while also benefiting the economy by unlocking a significant growth segment that was previously held hostage by poor financing. As we move forward digitally, embedded credit will serve as a strategic lever for MSME growth, resiliency, and inclusion. If you are in the MSME credit, fintech or platform development space, embedded credit should be part of your calculus. Moving credit into the typical flow of an MSME business means moving from a world of loan events to one of liquidity events, which can make a big difference for an MSME.