A restaurant owner opens the point-of-sale dashboard and sees an offer: a set amount of capital, a flat fee, and repayment taken as a percentage of each day's card sales. There was no application at a bank. The software company that runs the restaurant's payments made the offer, but in most cases a bank or licensed lender actually made the loan.
That is embedded lending: funding offered inside software a business already uses. This guide explains who does what in an embedded lending program, how the money and the risk move, and what rules apply. It is written for software companies, agencies, brokers and advisors weighing whether to offer funding to their own users. For the wider category, see our overview of what embedded finance is.
What is embedded lending?
Embedded lending is a loan, line of credit or cash advance offered inside a non-lender's software, typically prequalified from data the platform already holds, while a bank or licensed finance company provides the money. The platform supplies the customer relationship and the data. The lender supplies the license, the capital and the credit decision.
Four well-known programs show how the pieces fit, using each company's own disclosures as of November 2026:
| Program | Who issues or provides the financing | How it is repaid |
|---|---|---|
| Shopify Capital | "Issued by WebBank in the United States" | A percentage of daily sales, with an 18-month maximum term |
| Toast Capital | "Issued by WebBank" | "A fixed percentage of daily card sales processed through Toast" |
| Stripe Capital for platforms | Celtic Bank or Lead Bank for US loans, YouLend for the US merchant cash advance | A fixed percentage of each transaction, with minimum payments on some products |
| Square Loans | Square Financial Services, a bank owned by Block, per Block's January 2026 release | Not detailed in that release |
Notice that three of the four rely on an outside bank. Only Block owns the bank behind its product. The FDIC's 2020 approval of Square Financial Services, a Salt Lake City industrial bank, said it would "originate commercial loans to merchants that process card transactions through Square, Inc.'s payments system."
How does embedded lending work, step by step?
An embedded lending program runs in five stages: prequalify, offer, accept, fund and collect. Stripe's documentation lays the sequence out clearly, so we use it as the reference.
- Prequalify. Stripe says it "prequalifies connected accounts daily using their payment activity on Stripe with your platform." Its US eligibility floor includes at least three months of payments on the platform, annual volume of at least 5,000 and a monthly average of at least 1,000 in local currency.
- Offer. An eligible business sees a principal amount and a flat fee. Stripe calls the fee a premium and says there is "no variable interest."
- Accept. The business accepts on a page hosted by the provider or in an embedded component. Stripe requires acceptance on its own hosted page or component regardless of how the platform integrates.
- Fund. Stripe says it deposits funds within one to two business days of acceptance. Shopify says funding can arrive "in as quick as two business days, if approved."
- Collect. A fixed percentage of each sale is withheld until the balance is paid. Payments shrink when sales slow and grow when sales rise.
A worked example with real arithmetic
Stripe's documentation gives a sample offer: 20,000 of principal, a 15% payment rate and a 2,000 premium, so the business repays 22,000. Here is what that looks like in dollars over time.
- If the business processes $1,000 a day, Stripe withholds $150 a day. $22,000 ÷ $150 = about 147 processing days to repay.
- If sales drop to $600 a day, the withholding falls to $90. $22,000 ÷ $90 = about 245 processing days.
The fee is $2,000 either way, which is 10% of the principal. That is the trap in flat-fee pricing: the faster you repay, the higher the cost on an annual basis, because you paid the same fee for less time with the money. Our factor rate calculator converts a flat fee into an annualized cost so a business owner can compare it with a term loan.
Key takeaway: Revenue-linked repayment protects cash flow in slow weeks. It does not make the financing cheap, and a flat fee repaid quickly can carry a high annualized cost.
Who does what: lender, platform and compliance roles
In most embedded lending programs the bank or licensed lender makes the credit decision and holds the loan, the platform markets and presents it, and servicing and risk are split by contract. The contract matters more than the brand on the screen. Toast's annual report is one of the few public documents that spells the split out.
From Toast's Form 10-K for fiscal 2025, filed with the SEC:
- Loans are issued by Toast's bank partner, which the filing describes as a Utah-chartered, FDIC-insured industrial bank.
- "Toast Capital markets the loans and acts as servicer of the loans."
- Toast receives "a servicing fee based on the outstanding balance of loans being serviced" plus a fee "that varies depending on the credit performance of the loans."
- Each month Toast must buy back loans from a given quarter that are charged off, non-performing or outside the bank's credit policy, unless the purchases would exceed 15% of the original principal of that quarter's loans.
Run the numbers on that last point. If the bank originated $10 million of Toast Capital loans in a quarter, Toast's obligation to buy that quarter's bad loans would stop at $1.5 million of original principal. Toast says plainly that because of these arrangements "we are subject to credit risk on the loans extended by our bank partner." The platform earns fees, and it shares the losses.
Stripe describes a lighter role for the platform. Its documentation says "Stripe and its financial partners manage eligibility, underwriting, pricing, funding, servicing, and collections," and for Stripe-branded offers, "your platform isn't liable for credit losses." Platforms that want co-branding or a revenue share choose a deeper integration.
Here is the general pattern, with the caveat that every program's contract decides the details:
| Role | Lender or bank | Platform | Technology or program manager |
|---|---|---|---|
| Credit decision and pricing | Usually | Sometimes supplies data and models | Sometimes |
| Funds the loan | Yes, or the platform's own bank | Only if it owns a bank or buys loans | Rarely |
| Presents the offer | No | Yes | Provides components |
| Servicing and collections | Often | Sometimes (Toast services its loans) | Often |
| Credit losses | Yes | Depends on contract (Toast shares them) | Depends on contract |
| Borrower disclosures | Provider's duty in most state laws | Must not contradict them | Often generates them |
What rules apply to embedded business lending?
Commercial lending is lighter-touch than consumer lending, but several states now require cost disclosures on small business financing, and some regulate brokers. A platform that presents offers needs to know whether it is acting as a broker under these laws.
- California. The DFPI's commercial financing disclosure regulations, implementing SB 1235, took effect December 9, 2022. Providers of loans, open-end credit, factoring and merchant cash advances must disclose metrics including "the Annual Percentage Rate calculated for the transaction" and, for products without a monthly payment, an average monthly cost.
- New York. The Department of Financial Services adopted a regulation in February 2023 requiring standardized disclosures when providers extend offers of commercial financing "in amounts of up to $2,500,000." It also sets duties for "financers and brokers."
- Texas. HB 700 added Chapter 398 to the Texas Finance Code, effective September 1, 2025. The OCCC's adopted rules say the law "requires providers and brokers to register with the OCCC by December 31, 2026." Banks and credit unions are excluded under the statute.
- Federal data reporting. The CFPB's revised small business lending rule under Section 1071 was issued May 1, 2026, and the CFPB's rule page gives a compliance date of January 1, 2028. It applies to covered financial institutions, so a platform that funds or holds loans should check whether it is one.
Outside the US the platform's role can be regulated directly. Stripe notes that in Germany credit brokerage requires a license under §34c of the Trade Ordinance and in France platforms may need to register as an intermediary with ORIAS before offering financing.
The banks behind these programs carry their own duties. The June 2023 Interagency Guidance on Third-Party Relationships says a bank's use of third parties "does not diminish its responsibility" to comply with the law, including consumer protection law. Expect a sponsor bank to audit your marketing and complaint handling.
This is a general overview, not legal advice. Confirm your platform's role and obligations with counsel before launch.
How do platforms make money from embedded lending?
Platforms earn from embedded lending in three ways: fees or revenue share paid by the lender, servicing and performance fees, or interest income if they hold loans themselves. Each step up adds revenue and adds risk.
- Referral or revenue share. The lender pays the platform for originated loans. Stripe lists revenue sharing as an option on its deeper integrations but does not publish the rate. Public, sourced benchmarks for these splits are scarce, so get every figure in writing from the provider.
- Servicing and performance fees. Toast's 10-K shows this model: a fee on outstanding balances plus a fee tied to credit performance, in exchange for marketing, servicing and limited buyback exposure.
- Balance sheet lending. A platform with its own bank, like Block, keeps the interest or fee income and the losses. Block's January 2026 release reports Square Loans loss rates "less than 3%" and says Square Financial Services has originated more than $20 billion across Square Loans and Cash App Borrow since the bank opened. Those are company-reported figures.
The demand is real but not unlimited. Bain & Company's September 2022 release projected US embedded business lending to grow from $200 million in 2021 to $1.3 billion by 2026, a projection made four years ago. The Fed's 2026 Report on Employer Firms found 29% of applicants applied at online lenders in 2025, up from 17% in 2020, and 60% of online lender borrowers said costs were higher than expected. A platform that puts its name next to a lending offer inherits that expectation gap.
Is embedded lending right for your platform?
Embedded lending fits platforms that see their users' sales or receivables every day and serve businesses that need working capital often. It fits poorly where the platform has little financial data or where users rarely need funding.
Use these questions before signing with any provider:
- Do you hold repayment-grade data? Revenue-linked programs work because the platform sees every sale. Without that, offers need traditional underwriting and the advantage shrinks.
- Which product will your users actually get? A term loan, a line of credit and a merchant cash advance are regulated and priced differently. Stripe's US lineup includes all three, with its line of credit in private preview.
- Who services and who eats losses? Get the answer in the contract, not the pitch deck. Toast's arrangement shows a platform can carry real credit exposure.
- Are you a broker under state law? California, New York and Texas each address commercial financing disclosures, and New York and Texas address brokers explicitly.
- Should you build, buy or partner? Our build vs partner vs white-label guide works through the cost and control tradeoffs.
Loanistry is owned by Trulli, which runs a lending platform for brokers, agencies and software companies: trulli.ai.
Sources
- Shopify: Shopify Capital, checked November 2026
- Toast: Toast Capital Loan FAQ, checked November 2026
- Stripe: How Capital for platforms works, checked November 2026
- Toast, Inc.: Form 10-K for fiscal year 2025 (SEC), checked November 2026
- Block, Inc. via Business Wire: Block surpasses $200 billion in credit provided to customers, January 2026, checked November 2026
- FDIC: Deposit insurance approval for Square Financial Services, March 2020, checked November 2026
- California DFPI: Commercial financing disclosure regulations effective December 9, 2022, checked November 2026
- New York DFS: Superintendent adopts updated regulation for commercial financing disclosures, February 2023, checked November 2026
- Texas OCCC: Commercial sales-based financing rules adoption, 2026, checked November 2026
- CFPB: Small Business Lending under the Equal Credit Opportunity Act (Regulation B), 2026 final rule, checked November 2026
- CFPB: Small business lending rulemaking, checked November 2026
- Federal Reserve: SR 23-4, Interagency Guidance on Third-Party Relationships: Risk Management, checked November 2026
- Bain & Company: Embedded finance transaction value to more than double to $7 trillion in US by 2026, September 2022, checked November 2026
- Federal Reserve Banks: 2026 Report on Employer Firms, checked November 2026