What the Growth of Alternative SME Lending Really Means for Embedded Finance

A Brief History of Alternative SME Lending

To understand where embedded finance is heading, it helps to look at how alternative lending emerged in the first place.

1. The early phase: solving what traditional lending couldn’t scale

In the early 2010s, SME lending in Germany was still largely relationship-driven. Processes were manual, decision cycles were long, and smaller loan sizes were costly to handle. Traditional bank infrastructure simply wasn’t built for speed or digital scale, especially when it came to SMEs with short-term or situational financing needs.

This gap created space for alternative lenders. They focused on what was missing:

• Faster credit decisions
• Fully digital application flows
• Data-driven underwriting
• Financing embedded directly into platforms

By meeting SMEs where they already were (online), alternative lenders improved access to capital and helped normalize the idea of embedded lending. For many platforms, offering financing became a logical extension of their core service.

“Embedded lending didn’t start as a strategy, it started as a response to friction. Platforms and SMEs needed financing that actually fit into their workflows.” - Miriam Wohlfahrt, Founder & Co-CEO of Banxware

2. From experiment to expectation (2020–2024)

What began as a solution to a specific problem quickly gained momentum.

Between 2020 and 2024, Germany’s alternative lending market grew at a compound annual growth rate of around 15.8%, reaching a market size of approximately $4.1 billion by 2024. This growth was driven by several reinforcing dynamics:

• Rapid expansion of e-commerce and platform-based business models
• Rising SME demand for fast, contextual financing
• Increasing adoption of BNPL, invoice financing, and short-term working capital products

Crucially, platforms became the dominant distribution channel. Financing moved closer to the transaction and ultimately closer to the actual moment of need.

3. What the forecasts tell us: continued growth (2025–2029)

Looking ahead, the market is expected to continue growing, but in a more mature form.

From 2025 to 2029, Germany’s alternative lending market is forecast to grow at a CAGR of around 14.1%, expanding from roughly $4.7 billion to about $8.0 billion by the end of the decade. This growth is expected to continue despite tighter regulation around BNPL and consumer credit models.

That’s an important signal. Alternative lending isn’t growing because it avoids regulation, it’s growing because embedded distribution, better data, and institutional capital make it structurally attractive.

At the same time, the market is evolving from a fragmented fintech landscape into a more regulated, partnership-driven and institutionally capitalized ecosystem.

Where Pure Alternative Lending Starts to Reach Its Limits

Growth, however, also reveals limitations.

Many alternative lending models work extremely well for specific SME profiles and use case, like short-term liquidity, speed-sensitive situations, or thin-file businesses. In these scenarios, fast decisioning and digital access are exactly what’s needed.

But as embedded lending matures and platforms scale, the limitations are less about coverage and more about capacity and product depth.

1. Capital intensity becomes a constraint.

Many alternative lenders operate on balance-sheet or warehouse-funded models. This works well for smaller ticket sizes, but it makes it difficult to offer larger loans or long-term credit at competitive pricing. For growing SMEs, this often means that financing needs outgrow what a single alternative model can sustainably provide.‍

2. Product variety is limited by economics.

Term loans, revolving credit lines, and larger financing structures require long-duration capital and stable funding. Alternative lenders tend to specialize, for good reason, but that specialization limits the range of products they can offer within one embedded setup.

3. Speed alone stops being the differentiator.

Fast access to capital remains important, but it’s no longer sufficient on its own. SMEs at different stages need different products, structures, and price points, not just faster versions of the same loan.

In other words, the question for platforms shifts.

From: “How do we offer financing quickly?”to “How do we reliably offer the right financing, across ticket sizes, products, and growth stages?”

That’s the point where embedded lending needs to evolve beyond a single-model setup.

Orchestration: Bringing Alternative Lenders & Banks Together

This is where orchestration becomes essential.

Instead of integrating and managing multiple lenders independently, platforms benefit from a single embedded flow that connects both banks and alternative lenders. The result is:

• Broader SME coverage across sizes and industries
• Higher acceptance rates through better matching
• Competitive pricing by including bank offers
• Reduced operational complexity
• Stronger customer retention, as SMEs stay within the platform ecosystem

At Banxware, this orchestration approach allows platforms to combine different financing options seamlessly. For example:

• Banxware Sofortfinanzierung supports fast, fully digital financing from €1,000 to €250,000, often with payout within 24 hours and a transparent one-time fee.
• HVB FlexFinanzierung complements this with a flexible credit line from €250,000 up to €5 million, designed for larger, long-term financing needs with bank-level pricing.

Both products sit within the same embedded journey, without forcing SMEs to search elsewhere.

“The future of embedded lending isn’t about choosing between banks and alternative lenders. It’s about making them work together in a way that truly fits how platforms and SMEs operate.” - Jens Röhrborn, Founder & CEO of Banxware

Conclusion

Embedded lending is no longer an add-on. It is becoming part of the core infrastructure of digital platforms.

Alternative lending played a critical role in getting here. It removed friction, increased speed, and made financing accessible at the point of need. That contribution won’t disappear and neither will the market’s growth.

But as embedded finance matures, the bar is rising. Platforms are no longer judged on whether they offer financing, but on how well that financing adapts as SMEs grow. Speed remains important, but on its own it’s not enough. SMEs need different products, ticket sizes, and price points over time and they expect to find them without leaving the platform.

This is the inflection point for embedded lending.

Platforms that rely on a single lending model will eventually face trade-offs between growth, pricing and customer retention. Platforms that bring alternative financing and bank-backed products together can support SMEs more sustainably, without adding complexity to their own product.

Banxware’s role is to sit in between and make that work: turning multiple financing options into one coherent embedded experience, so platforms can focus on their core product.