Answering 12 Common Questions Your Merchants Have About Embedded Lending

In part one of our series on embedded lending, we took a deep dive into how embedded lending works, the problems it solves, the stakeholders involved and the enormous opportunity it presents frontline payment providers. In part two, we’re looking at some of the common questions surrounding embedded lending, including many of the ones merchants are likely to ask when considering whether or not to accept an embedded loan offer.

The topics we’ll cover include:

• General embedded lending questions
• The impacts of embedded lending on consumer credit scores
• Embedded loan accessibility
• Embedded loan repayments
• Consequences of embedded loan defaults
• AI integration into embedded loan systems

Question: How do embedded loans work?

Answer: Embedded loans provide merchants with fast, easy access to business capital right when they need it, directly through the platforms they already use. Rather than a long, complex application process and slow approval, embedded lending provides pre-approved offers to eligible merchants.

Loan amounts and fees are preset and typically based on the merchant’s sales, activity and history with the platform. This way, each merchant’s offer is custom-tailored to their risk profile. All a merchant has to do is go to their lending tab and agree to the loan terms; the capital is often available in as little as 24 hours or less.

For frontline payment providers, offering embedded loans is a way to add significant value for merchants, open additional revenue streams and become a more critical partner. It’s also a way to better compete with the big platforms and marketplaces that offer embedded lending, like Amazon, Walmart Marketplace and more.

Question: Are there different types of embedded loans?

Answer: There are three main types of embedded lending/embedded financing options:

Fixed Loans: Fixed loans offer a fixed payment schedule, often biweekly, that sees the merchant repay the same amount each period regardless of revenue. For maximum simplicity, these loans are normally fixed-fee-based rather than interest-based. Fixed embedded loans are a great choice for merchants who want predictability.

Flex Loans: Flex loans base repayment on a percentage of the merchant’s sales. Each day, the embedded loan provider takes a percentage of the total sales revenue and applies it toward the loan repayment. Flex loans suit merchants with less predictable revenue or cash flow, or merchants looking to repay their loans faster when sales are good.

Capital Advances: Many embedded lenders also offer capital advances, which technically aren’t loans at all. Instead, they’re an agreement a merchant makes to sell the provider a share of future receivables. The provider pays the full sum upfront as an advance, and the merchant then delivers the provider’s share over time, as a “repayment”.

Question: How do embedded loans impact a merchant’s credit score?

Answer: Embedded loans don’t require credit checks like traditional loans, so there is no upfront impact to credit score, no matter how many a merchant accepts. Most embedded lending providers and the banks backing them don’t report regularly to credit bureaus as long as loans are being repaid. With capital advances, there is no possible impact to credit score, either positive or negative, since the product is technically not a loan.

Question: Does a merchant’s personal credit score impact their ability to be pre-approved for these loans?

No. Embedded loans are commercial loans based on the merchant’s selling history. There is no traditional application and no credit check involved, so the merchant’s personal credit never comes into play as part of the underwriting or pre-approval process.

Question: What volume of transactions/revenues is needed to qualify for embedded loans?

Answer: Embedded loan providers don’t generally set hard minimums for a merchant’s monthly transaction volume or revenue to determine if they’re eligible for an offer, although some may require a minimum of six months of processing history. Instead, they use advanced underwriting systems and deep data analysis to tailor loan amounts and capital pricing based on a seller’s history, recent sales trends and momentum. That makes data and predictability over time more important than volume numbers.

Question: If a merchant has lower than average revenue/transactions, are they charged a higher interest rate?

Answer: Most embedded loans aren’t interest-based; instead, they typically charge a fixed capital fee that is spread out across the life of the loan term. Merchants with lower transaction volumes may see higher capital access fees due to more difficult underwriting, or they may not have access to a pre-approved offer at all until they generate enough data for reliable underwriting. Merchants with enough history but low monthly revenues will see lower pre-approved amounts available through their account dashboards.

Question: What criteria do embedded loan providers look for when approving merchants?

Answer: Embedded loan providers keep their underwriting criteria confidential. However, generally speaking, sales history is the primary driver for pre-approval. Providers use advanced systems to compare a merchant’s current and historical sales data against a database of millions of similar loans to determine whether the merchant is likely to be able to repay a loan, how much should be offered and what the capital access fee will be.

Question: How are embedded loans repaid?

Answer: Embedded loans are either repaid on a fixed time scale (i.e., a set amount every X days or weeks across the full loan term) or as a percentage of daily revenue (i.e., 10% of daily sales until the loan is repaid).

Repayments are managed by the loan provider and the platform hosting it so that payments happen automatically, requiring nothing of the merchant. In some cases, payments are automatically withdrawn from a linked bank account by the provider. In other cases, the fixed payment or percentage of sales is automatically remitted to the loan provider first, and the remainder of the balance is then paid out to the merchant. That makes the risk of default low.

Question: How do embedded loan providers account for seasonality when structuring loan repayments? For example, would a restaurant that only operates during the summer receive a personalized repayment plan that aligns with its seasonal cash flow?

Answer: Embedded loans generally don’t personalize repayment plans based on seasonal cash flow. An eligible merchant can choose a term length that fits their seasonal tempo and cash flow, but ultimately, they are still responsible for meeting either the fixed payment amount or the minimum daily payment if using a flexible loan. For example, a business with a flexible loan at 10% of daily revenue that generates zero revenue for a period can’t just pay zero during that time.

Question: What happens if someone defaults on a loan from an embedded lending provider?

Answer: If a merchant defaults on an embedded loan or breaks the terms in any way, the loan provider can do any of the following:

• Demand immediate repayment of the full amount
• Increase the repayment rate up to 100% of daily revenues until the loan is paid off
• Debit missed payments from the merchant’s linked bank account.

Because almost all embedded loans are unsecured, there is no traditional collateral involved. But embedded loan providers may require a security interest in a merchant’s receivables and other bank accounts. That security interest gives them the right to recoup the loan from those accounts in addition to a linked bank account if the merchant ever defaults.

Question: Do embedded lending providers use AI to identify eligible merchants?

Answer: Yes, embedded lenders commonly use AI-powered tools to analyze large volumes of merchant sales data provided by the host platforms. This enables embedded lenders to proactively and accurately determine which merchants are eligible for loans, how much business capital they can access and what the cost will be. By utilizing AI tools, embedded lenders can underwrite a host platform’s merchants without the need for an application process. That allows pre-approved loan offers to be extended to merchants with zero friction. That fast, effortless access is a huge part of embedded lending’s value proposition, and it wouldn’t be possible without AI tools.

Question: How do embedded lending providers avoid biases in AI training data?

Answer: The AI-based underwriting involved in embedded lending avoids training bias by focusing almost entirely on pseudonymized sales data and requiring no personal application or personal credit check from business owners. That ensures the analysis minimizes the inclusion of the common bias factors that AI systems are prone to, like the gender, race and sex of merchants.

NMI now offers embedded lending as part of our merchant relationship management suite, allowing partners to offer their merchants fast and frictionless access to capital. To find out more about NMI Business Capital and how to help your customers while unlocking a new source of recurring revenue, reach out to a member of our team today.