Bank Loan or Embedded Financing? Depends on How Sunny a Business Is About the Economy

As the U.S. economy bumps up against fluctuating interest rates, tariffs and newly complex supply chains, medium-sized companies face critical decisions about how to fund their operations and fuel growth. The way these firms choose to access capital isn’t just a technical deliberation about their finances; it’s also a telling sign of how confident they are in the current business environment. Whether they borrow strategically for expansion or defensively to manage their immediate operational needs offers a direct insight into their optimism — or lack thereof — about what lies ahead.

Forthcoming research from PYMNTS Intelligence unpacks this dynamic, examining the preferences of U.S. middle-market firms when choosing between traditional credit options and newer, integrated financing solutions known as embedded financing. Mini spoiler alert: The choice is influenced by how confident companies feel about their day-to-day operations and the broader economic climate.

Traditional vs. Embedded

Middle-market companies with annual revenues between $100 million and $1 billion traditionally rely on traditional financing methods. Those involve applying for loans or lines of credit directly with banks, mechanisms governed by longstanding banking regulations and clear terms defining how the credit must be paid back. With potentially higher credit limits, more favorable repayment structures, access to larger capital amounts, longer timeframes for repayment and trusted relationships with financial advisors, these traditional credit sources are the slow-cooked comfort food of business finance.

Embedded financing, a niche alternative, offers a different model. Instead of a separate bank application, it integrates bank and non-bank lending capabilities directly into the digital tools a company already uses, such as its eCommerce platforms, accounting software or invoicing systems.

Consumers are already repeat fans of the embedded financing menu. Like for businesses, embedded financing for shoppers involves delivering financial products through non-financial services platforms; two examples are retail buy now, pay later programs and rideshare payments to Uber via the company’s app or website. The selling points: speed and efficiency. No slow-cooking, but instead a quick, delicious meal. But for businesses, there’s a price. Like a takeout meal ordered from a restaurant that costs more than making it yourself at home, embedded loans typically have higher interest rates.

Despite the benefit of speed, embedded financing hasn’t yet achieved widespread love from middle-market firms. Companies surveyed between March 17 and March 27 are worried about the smoothness of the application process and how quickly they can get approved. That seeming cognitive disconnect arises even though some banks, citing a less favorable or more uncertain economic outlook, are already reporting increased demand from mid-sized companies for commercial and industrial loans, Federal Reserve data in January shows.

The convenience of integrating with modern business platforms aside, embedded lending remains a second-place choice for most middle-market firms. Only one in five surveyed preferred embedded options over traditional ones. The less confident a company is about its future, the less likely it is to choose that alternative option. The hesitation comes even as more firms report facing headwinds from tariffs; thus, there is a greater need for the quickness that something like embedded lending offers. Companies that are more confident about navigating the Trump administration’s trade war with China and other major trading partners are an easier sell: Nearly one in three prefer embedding lending over traditional bank loans and credit lines.

The study, based on a survey of 60 heads of payments at U.S. companies, underscores that the choice of financing is fundamentally linked to a firm’s risk tolerance, predictability, and specific financial needs. For providers of embedded lending solutions, the research indicates the need to cater to distinct user needs. Companies needing quick financing in uncertain times have different priorities than stable firms seeking efficiency and control of their budgets.

Read more:

How Retail Small Businesses Finance Survival in Uncertain Times

Survival or Surrender: Will Tariffs Force Small Businesses Off the Global Stage?

Nearly Three-Quarters of Small Businesses Using Embedded Lending Access Bigger Credit Lines

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