Embedded Lending Hits Friction as Mid-Market Firms Navigate Uncertainty

Middle-market firms in the United States face a financing puzzle. As they grapple with interest rate pressures, tariffs and unpredictable supply chains, the calculus behind their approaches to obtaining financing is becoming more complex. While some companies see financing as a lever to bankroll their strategic growth, others treat it as a necessary stopgap shaped by short-term operational uncertainty. What’s clear is that the way a business chooses to access credit is one indicator of its optimism about the economic climate.

Recent PYMNTS Intelligence research sheds light on how middle-market firms choose between traditional credit and embedded financing solutions, with a focus on how their choices are deeply informed by their perceived level of certainty about their operations. While traditional credit from banks remains a dominant force, embedded lending is poised to become a larger player, transforming how businesses access funds for daily operations and future growth.

Embedded financing for consumers involves delivering financial products through non-financial services platforms, with retail buy now, pay later programs and rideshare payments to Uber via the company’s app or website two examples. For businesses, it allows companies to side-step the traditional loan application process and instead access funding from banks or financial technology companies directly through the technologies the businesses already use, such as eCommerce websites, invoicing software or accounting tools. The mechanism is the financing equivalent of one-stop shopping, averting the need for a business to go outside its systems to apply for and receive funding.

Four key findings on the relationship between uncertainty levels and financing preferences emerge.

How uncertainty affects financing choices

First, firms experiencing low levels of operational uncertainty are twice as likely to seek out any type of financing as a strategy to grow their business rather than as a necessity. Second, embedded loans—despite their integration with modern platforms common at companies—remain second in preference for most companies. Third, motivations for using embedded finance differ: Firms in high-uncertainty operating environments seek a speedy disbursement of funds but are apprehensive of the unclear terms and regulations governing embedded financing, making them prefer traditional methods, such as bank loans. At the same time, companies with greater operational stability value the efficiency of applying for and accessing financing through the platforms they already use. Either way, the traditional route of borrowing from banks remains the preferred path for firms that prioritize transparency, control and compliance familiarity.

As U.S. middle markets navigate this terrain, the choice between traditional and embedded financing options is less about the credit product and more about a recipient firm’s risk appetite, operational predictability and financing needs. For lenders and financial technology firms (FinTechs) offering embedded financing, the message is clear: Tailoring offerings to match a borrower’s degree of certainty about the business climate is key to unlocking adoption and trust.

These are just some of the key findings from “Lending in Uncertain Times: Strategic Shifts in U.S. Middle Market Financing,” a PYMNTS Intelligence study conducted between March 17, 2025, and March 27, 2025. Data was collected from a survey of 60 heads of payments, each representing U.S. companies with annual revenues between $100 million and $1 billion.

• Strategic Financing Doubles in Stable Conditions
• Embedded Lending Still Has Limited Appeal
• Why Firms Choose Embedded
• Clear Terms and Familiarity Prevail
• Read More
• Methodology

Strategic Financing Doubles in Stable Conditions

While half of low-uncertainty middle-market firms use financing as a strategy, just one in four with high uncertainty about the business climate do so.

Middle-market firms experiencing operational stability are significantly more likely to use any form of financing as a strategic tool, with half reporting they mostly or always did so in the last 12 months. This is in stark contrast to firms operating under high uncertainty about the business climate, where only one in four report using financing for strategic purposes. This notable difference highlights how confidence enables firms to view credit as growth capital, rather than merely as a lifeline.

More confident in projecting their future returns on the capital they borrow, stable businesses often utilize loans or credit tools not merely to fill cash gaps, but to fund inventory ahead of demand, invest in marketing or finance expansion. With reliable forecasting, these firms can treat debt as leverage for growth rather than a last resort.

Meanwhile, companies facing higher uncertainty often exhibit defensive financial behavior. In fact, one-quarter report that they mostly or always use financing out of necessity, as do 42% of those facing a medium level of certainty about the business climate’s predictability. Such defensive financial behavior is especially evident in the goods industry, where 38% report that they use financing out of necessity. This suggests that goods providers are feeling the impact of tariffs and unpredictable supply chains and find themselves reacting to constraints rather than using financing strategically.

To unlock more strategic financing across the board, financial institutions need to increase confidence among high-uncertainty firms by providing flexible, tailored embedded financing products and transparent risk-sharing mechanisms. Education about the financing alternative as a growth lever, rather than a crutch, could also shift perception and increase adoption.

Embedded Lending Still Has Limited Appeal

Only one in five mid-sized firms prefer embedded lending, with preference topping out at just 32% among low-uncertainty firms.

Embedded finance solutions—like credit at checkout, loans integrated into enterprise resource planning (ERP) platforms, software that integrates multiple business processes across finances, supply chain management and other functions—offer speed and convenience. But firms still view these solutions with skepticism. Rather than requiring businesses to apply for a loan, embedded lending involves injecting loan and financing options directly into a business’s existing platform or application. For firms with less business certainty, the niche financing method raises concerns about friction in application processes, the speed of approval and the clarity of loan or credit terms.

Despite the growing presence of embedded finance in consumer markets, only 20% of U.S. middle-market firms prefer it over traditional options. Reluctance is sharper among high-uncertainty firms, where just 7% prefer embedded options. Among firms operating in low-uncertainty environments, preference for embedded lending rises to 32%, the highest level. This shows that more confident firms may be more familiar with embedded lending options, but more importantly, that they are less likely to worry about their ability to repay or unclear terms.

By contrast, traditional financing—through banks or established credit relationships—remains the trusted default, especially for high-uncertainty firms. The compliance familiarity, clarity of repayment terms and perception of lower risk all contribute to its staying power. Traditional loans also offer benefits that embedded options often lack: higher credit limits and favorable repayment terms.

These findings suggest that embedded lending still lacks the trust and transparency mid-market executives need to shift their loyalty. For embedded lending providers to gain traction, they must address trust and transparency issues directly. That means offering clear documentation, robust customer support and, perhaps most importantly, the ability to tailor offerings to a firm’s operational confidence. Without these adjustments, embedded lending will remain a niche solution, not a standard practice.

Why Firms Choose Embedded

One-third of mid-market firms facing higher uncertainty would prefer embedded lending for faster approvals, while low-uncertainty firms like the method for its ability to improve their cash-flow efficiency.

While overall preference for embedded lending remains low, motivations for using it differ sharply depending on a firm’s operational certainty. For all companies surveyed, the top driver is speed, with 20% citing faster approval times compared to traditional bank loans as the top reason. Among firms experiencing a middling level of uncertainty, this share rises to 35%. This suggests that when firms are unsure about their future cash flow or facing supply chain disruptions, rapid access to capital, even under less favorable terms, can be a lifeline. Such companies are often in survival mode, prioritizing quick decisions over optimal terms.

Conversely, low-uncertainty firms value operational efficiency and cash flow control when borrowing. For them, embedded lending represents a way to reduce their paperwork, better align their payments with purchases and manage liquidity. This group tends to favor financing that integrates smoothly into back-end systems and provides flexibility without disrupting existing workflows.

This distinction underscores a central challenge: Embedded lending solutions must serve two very different use cases. While higher uncertainty firms value speed and simplicity, those facing less uncertainty value integration and control. Such divergent preferences suggest that embedded lending providers must segment their audience not just by industry or size, but by operational predictability. One-size-fits-all offerings risk alienating both cautious and confident buyers. And that fast and clear approvals are important for all firms surveyed suggests that embedded lending providers need to do a better job marketing to middle markets about this benefit of embedded lending—something not provided by traditional lending options.

Clear Terms and Familiarity Prevail

Low-uncertainty firms value tailored solutions and familiar compliance regulations, while high-uncertainty firms opt for traditional loans out of concern with terms and conditions.

Traditional bank loans and lines of credit continue to dominate, particularly among firms operating in high-uncertainty environments. The top reason cited by 27% of these firms is the clarity of terms and conditions offered by traditional financial institutions.

For businesses facing volatility, the need for predictable repayment schedules, transparent interest rates and regulatory familiarity takes precedence over convenience. Data suggests that traditional loans offer a sense of control and security that embedded lending has yet to match.

Low-uncertainty firms also prefer traditional lending, but for different reasons. Data shows that these firms value the ability to tailor loan terms to their specific needs and appreciate the regulatory compliance built into established financial products. They’re more likely to negotiate terms proactively and view lending as part of broader financial planning.

Traditional financing also provides greater access to bulk capital, longer repayment horizons and trusted advisor relationships—features that embedded options often lack. These benefits are particularly valuable in capital-intensive industries like goods and retail, where liquidity needs are ongoing and variable.

While embedded finance offers speed and integration, it still lacks the consistency and trustworthiness of traditional solutions. For embedded lenders to compete, they must close the transparency gap and replicate the reliability that banks provide. Until then, traditional finance may remain the preferred option, not just because it’s familiar, but because, in uncertain times, familiarity often equates to safety.

Read More

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Methodology

This edition of the 2025 Certainty Project, “Lending in Uncertain Times: Strategic Shifts in U.S. Middle Market Financing,” is based on a survey conducted between March 17, 2025, and March 27, 2025. It examines perceptions of how the level of a firm’s operational uncertainty impacts its interest in using financing, whether via embedded lending or through a traditional financial institution. Data was collected from a survey of 60 heads of payments, each representing U.S. companies with annual revenues between $100 million and $1 billion.