SaaS lending, also known as embedded lending, enables software companies to provide loans directly to customers within their platform. Instead of having to seek out a third-party lender, customers access lines of credit, cash advances, working capital, and other financing options within the SaaS platform they already use. This frictionless user experience creates additional value and deepens customer relationships by turning the SaaS platform into a central financial hub.
SaaS lending benefits both software providers and their customers. Customers gain increased access to the capital they need to grow their business flexibly and conveniently. SaaS companies gain multiple advantages that lead to a significant return on investment (ROI):
- New revenue generation: Embedded lending creates new, non-product-based revenue streams through interest on loans and fees. It can also increase the number of closed sales and the total value of each sale because customers can use the embedded loans to gain more purchasing power.
- Reduced churn: Customers who use a SaaS’s financing options become more invested in the platform, strengthening their loyalty and making them less likely to switch.
- Stronger customer relationships: By meeting customers’ financial needs, the SaaS company becomes a trusted partner with a shared stake in their ongoing success.
The SaaS data advantage in lending
SaaS platforms possess a decisive advantage when it comes to lending: proprietary data. Unlike traditional lenders who rely on a limited view of a business’s financial history (e.g., credit scores and tax returns), SaaS companies have a real-time, comprehensive look into their customers’ operational health. This visibility allows them to create more accurate credit risk models and offer uniquely flexible lending products with repayment terms that align with a customer’s cash flow cycle.
Two examples of SaaS platforms using proprietary data to their advantage in embedded lending include Flexport and Toast Capital.
Flexport is a global freight forwarding and logistics platform that manages the entire supply chain, giving it a complete picture of customers’ inventory in transit, shipping costs, and order volumes.
With help from this data, Flexport Capital offers financing options that traditional lenders can’t. Flexport customers can finance up to 120 days’ worth of inventory purchases, enabling them to pay vendors before receiving payment from their customers. This financing allows them to redirect working capital to growth areas, rather than limiting themselves while they wait for invoices to get paid.
Because of their unique supply chain data, Flexport already knows how much its customers qualify for, which makes the lending process faster and easier than going to a traditional bank.
→ Learn how Flexport used Canopy to scale its embedded lending program.
Toast is a leading restaurant management platform that handles everything from point-of-sale transactions to payroll and online ordering. This gives the company a real-time data stream on a restaurant’s daily sales, seasonal trends, and overall performance.
Through Toast Capital, the company offers loans to its restaurant partners based on this operational data, rather than just credit scores or bank statements. Repayments are automatically deducted as a fixed percentage of the restaurant’s daily credit card sales, meaning repayment is tied to the restaurant’s performance. This innovative repayment structure is a game-changer for restaurants, as it removes the burden of a fixed monthly payment and allows them to manage cash flow more effectively.
Only a SaaS platform can meet its customers’ financing needs to such a highly tailored degree, and that’s because of its unique data advantage.
Providers across many industries (not just SaaS) are catching on to the massive embedded finance opportunity. The global embedded finance market is expected to balloon to $251B by 2029, growing at a 16.8% compound annual growth rate from its 2024 market size.
The embedded finance market is expected to be worth 251.5 billion by 2029, growing at a CAGR of 16.8% during the forecast period.
What you need to integrate embedded lending into your SaaS
While embedded lending can significantly grow a SaaS business, integrating lending into a SaaS platform requires a technology stack to match the loan lifecycle from application to servicing. Rather than building a lending platform from scratch, many SaaS companies integrate with a modern lending platform like Canopy to embed the functionality they need.
Below are six key components SaaS companies need to launch an embedded lending product.
1.Decisioning
Assessing borrowers for creditworthiness is a major part of an embedded lending program. Within an embedded lending SaaS platform, this is ideally an automated process that leverages the proprietary data a SaaS has on its customers, such as the inventory and shipping data that Flexport has in the example above.
In addition to proprietary data, embedded SaaS programs will often use automated cash flow analytics software such as Pave or Taktile to evaluate borrowers more thoroughly. Rather than requiring an underwriter to manually review bank statements, these cash flow analytics programs can link to a borrower’s bank account, pull transaction data, and run that data through AI analytics to help determine creditworthiness in minutes.
The combination of proprietary data and cash flow analytics enables SaaS companies to provide better loans faster, when their customers need them. Due to a lack of data access and more rigid decisioning flows, traditional lenders aren’t equipped to offer the speed and convenience that embedded SaaS lenders can.
2. Loan origination
Origination includes decisioning, but also encompasses the loan application and disbursement of funds. This process includes document collection, underwriting, setting up the repayment plan, and funding the loan. Embedded lenders can increase their chances of getting loan customers by automating as much of this process as possible.
Since they have previously onboarded their customer to the SaaS platform, much of the needed information may already be available, leading to a faster origination process. Pre-populating the needed origination forms and processes gives embedded lenders a distinct advantage over traditional lenders, who often make customers go through painstaking application processes.
3. Borrower communication
Effective borrower communication is essential, as it can help ensure loans are repaid on time and can help lenders proactively address distressed accounts. A modern embedded lending solution provides automated, transparent communication with the borrower at every stage. This can include real-time notifications about the status of their application, reminders for upcoming payments, and secure portals for document submission and management. These features keep the borrower informed and engaged, improving the overall customer experience.
Canopy can help lenders automate borrower communication based on configurable workflows. For example, notifications can be sent for upcoming payments, when documentation is needed, or when a payment is past due. Additionally, lenders can use their proprietary data to identify successful customers, then use their communication platforms to offer new loan products.
4. Flexible Loan Servicing
Loan servicing is everything that happens after the loan is disbursed. This includes processing payments, handling customer inquiries, and managing collections. Because of their close customer relationship and proprietary data, embedded SaaS lenders have more flexibility in how they service loans than traditional lenders.
An embedded SaaS lender that’s closely integrated with customer accounts should be able to modify loan terms and payments as their customers’ status changes, while traditional lenders have more fixed repayment terms. In the Toast example above, repayment is deducted from a fixed percentage of daily sales. With Flexport, loans are paid back when customer invoices get paid.
Using Canopy, embedded lenders can offer flexible loan servicing that enables them to modify payment plans and interest rates on the fly. This type of flexible servicing helps distressed accounts avoid going into default and has led to a 30% average repayment rate increase.
5. Vendor integration
While the dream is to handle all processes under a single lending platform, the reality is that embedded SaaS lending is likely going to require at least a few vendor integrations for things like underwriting, fraud risk management, and compliance.
The ideal state with multiple vendors is to have one umbrella program that integrates with the entire lending stack via APIs, where lenders can go to manage all aspects of their loan program. It can feel overwhelming to try to piece together multiple vendors to create a lending program, but having that single system to manage it all from makes it much easier.
6. Card issuing and management
While not required for all types of embedded lending, card issuing and management is a powerful feature for some SaaS platforms. Companies use it to issue a virtual or physical credit card to a borrower directly through their platform. The SaaS company can then manage the card’s usage and track transactions, enabling them to offer more targeted lending products or even reward programs based on spending behavior.
Companies will need an issuer processor to offer physical or virtual cards. Processors like Stripe and Fiserv are commonly used for issuing cards in embedded SaaS lending.
Canopy offers an end-to-end card solution for embedded SaaS lenders to issue and manage credit cards. It integrates with issuer processors like Stripe and incorporates account setup, fraud resolution, and repayment servicing. Within Canopy, SaaS lenders can seamlessly onboard new customers, issue or freeze cards, manage billing cycles, and implement spending controls.
Canopy can help get your SaaS lending platform off the ground
While Canopy can handle many of the end-to-end processes, it’s also able to easily integrate with other vendors to create a single system of record for SaaS lending. Canopy has built-in integrations that make it easy for lenders to place all processes under one roof. With Canopy, building an embedded lending program doesn’t have to be a multi-year project because it has the API-based infrastructure you need to launch and scale fast.
Embedded lenders who are just starting can turn to Canopy for an integration-ready loan management system that helps them automate workflows and streamline lending processes. More established lenders can easily integrate Canopy into their existing ledgers while using it to offer more innovative loan products and flexible servicing solutions.
Ready to build or scale an embedded SaaS lending program? Reach out to Canopy to learn how you can get started.
