What is merchant financing?

Merchant financing is a type of financing that involves giving a cash advance to sellers on your platform. The ‘merchants’ (also known as restaurants) gain access to immediate working capital which they can invest into growth, and the amount is paid back flexibly as a percentage of monthly sales.

Platforms like food delivery platforms offer merchant financing in order to support their restaurant customers. Restaurants can receive the funds within 24 hours of approval, and invest this money to grow the business.

Thanks to percentage-based remittances, restaurants benefit from flexible terms. For example, if the restaurant has a quiet month, they’ll pay less towards the advance amount. And since merchant financing is all integrated with the platform’s platform data, it’ll automatically adjust based on recent sales.

As a food delivery platform, you can help restaurants via merchant financing in several situations:

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  Provide financial support to businesses that might not be approved by a traditional bank

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  Plug seasonal downturns

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  Fulfil extraordinarily large orders

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  Improve business efficiency by funding automation or equipment

And for the food delivery platforms who offer merchant finance, the fees generated can diversify your revenue streams and improve your bottom line. If you’re looking to build incredible loyalty, retain more merchants, reduce churn, and improve the bottom line, then you’re in the right place.

What are common challenges of food delivery platforms?

Merchant financing can aid food delivery services to overcome:

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  Churn

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  Low GMV

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  Difficulties to differentiate from competitors

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  Reliance on a single revenue stream

Churn

Churn is one of the most impactful problems relating to food delivery platforms, referring to the rate at which customers leave your platform. It’s well documented that retaining current customers is much cheaper than acquiring new ones.

Churn rates can be impacted by overall traffic to the delivery platform and restaurant experience, but it’s more often associated with poor financial experiences , like high platform fees and low order volumes.

finmid has identified that merchant financing can reduce churn by as much as 70% on food delivery platforms.

Low GMV

GMV stands for gross merchandise value, and in the case of food delivery platforms, it refers to the total value of orders per restaurant over a specific time period.

In the food industry, GMV can be affected by factors like product quality, pricing and standing out amongst the competition. But since merchant financing enables restaurants to invest in bettering their businesses, it’s been associated with a 20% increase in GMV.

Largely, this is due to restaurants re-investing the cash advance into effective marketing techniques, such as expanding their menu, creating a cohesive visual brand and even gamifying the customer experience through the creation of loyalty schemes, for example. These investments, in turn, tend to generate more orders from consumers.

Difficulties to differentiate from competitors

These days, many restaurants make themselves available on multiple food delivery platforms at once. After all, the end customer has at least two food delivery apps downloaded at any given time, with 20% of people using four.

In such a crowded market, merchant financing can help your platform stand out.

One of the most important metrics for any platform is Net Promoter Score (NPS), as this indicates how positively (or negatively) restaurants view your services. A common situation in financing for restaurants is that the pre-approved offer is much higher than the amount restaurants are actually offered, which can contribute to unsatisfied customers, reflected in a lower NPS.

Fortunately, that’s where merchant financing differs. Thanks to the data-led nature of finmid’s risk assessment process, platforms are able to keep restaurants happy by offering the full amount they’re pre-approved for. On average, this leads to an NPS of 80 plus, which is a metric that you can use to attract and retain more restaurants to your platform.

Reliance on a single revenue stream

Food delivery platforms are often set up to rely on just a single revenue-generating stream: service fees. But the industry lulls, with seasonal downward shifts in summer time in particular, which means fewer orders and lower revenue.

All of these factors lead to risks in relying on just one stream of revenue.

Fortunately, platforms can diversify their revenue streams by collecting fees from merchant financing products on top of their regular servicing fees. This better protects platforms against market shifts, and helps platforms to maintain stability, through periods of growth or stagnation.

Why do restaurants want cash advances from you?

Restaurants are satisfied when receiving merchant financing offers because it opens up the door to funding, and is both fast and convenient.

Merchants are underserved by traditional financing providers

Many in the hospitality industry struggle to access traditional financing. In fact, the results from a 2023 European Commission survey on access to finance is very telling, “businesses facing tighter financing conditions in the past year due to the general economic downturn. More specifically, the 2023 SAFE survey shows that nearly eight in ten businesses… see interest rates or prices being too high as the most important limitation to accessing finance in the future.”

Despite the growth of industries like food, restaurants still struggle to command the attention of big banks as they aren’t bringing in enough money. Traditional financing providers do not have the capabilities to access the complete financial picture as they’re only relying on traditional data sources. Even well-qualified businesses can be deemed ‘too risky’.

Burdened by lengthy approval processes, low success rates and steep fees, even well-qualified businesses are being left in the cold when they need a cash advance, or capital to invest into a new opportunity.

But thanks to the data-led nature of merchant financing, the additional information collected on delivery platforms allows making a guaranteed pre-approved offer, which can then be sent to businesses automatically.

With instant access to this capital, restaurants can instantly invest it to kickstart their growth.

Merchant financing is fast and convenient

Applying for a traditional bank loan can be incredibly stressful for restaurant owners, especially due to the lengthy application forms, high risk of manual error, and confusion over financing terms. Not to mention the fact that waiting for a decision takes three to five weeks on average.

In comparison, many restaurant owners prefer merchant financing thanks to its embedded nature; data is integrated, eliminating the need for application forms altogether. Forget lengthy document gathering and decision times, pre-approval makes the merchant financing process seamless. In turn, it can make a big difference to the speed at which restaurants are able to invest and grow.

How to start offering finance to your merchants?

Software platforms are the new wave of banks, able to provide every merchant with access to financing without the involvement of a traditional financial institution. Fortunately, a done-for-you approach with an embedded finance partner helps you to get started quickly and bypass the risks of regulatory non-compliance.

Embedded finance refers to the integration of financial services into a non-financial platform. By partnering with an external provider, you can white label finance services to ensure everything remains on-brand, but without taking on the risk.

How to compare embedded finance providers

It can feel a little daunting to dive straight into the embedded finance world, so here are some of the factors you can compare between embedded finance providers:

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  Time to marketHow long will it take you to get up-and-running from signing the contract to offering your first merchant finance deal?

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  White-labellingDoes the provider fully integrate with your brand, or will sellers be confused and put off by seeing multiple brands inside your restaurant portal?

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  Geographical coverageIs the embedded finance provider approved to legally provide financial services in your current and planned locations?

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  Merchant experienceThe purpose of providing merchant finance is to improve overall restaurant experience and delivery platform loyalty - so the onboarding and ongoing process should support this. Check net promoter score, customer service availability, time to market and ease of access to gather information about the experience.

Partner with finmid to finance your merchants

If you’re looking to grow a food delivery platform, finmid can help launch your platform into merchant financing and help you stick the landing.