How do small businesses secure the capital they need to expand and grow when banks don’t seem particularly interested in lending to them? Data from the British Business Bank shows bank lending to UK small businesses in the form of loans and overdrafts fell 18% last year; challenger banks moving into a market where the biggest UK lenders are now far less active than in the past are providing some support, but not enough for many start-ups and scale-ups.

One organisation hoping to start plugging the gap is the payments company GoCardless, which will today announce a joint venture with American fintech Pipe to offer loans to UK small businesses. The business will leverage the value of its payments data in order to offer pre-approved capital facilities to many of its small business customers.

A pilot programme has already shown good results, says Jolawn Victor, chief growth officer at GoCardless. “Strong conversion rates from the pilot show there is pent-up demand for this type of financing,” she says.

It’s a novel approach to an old problem for small businesses, which often lack the size and scale that traditional lenders look for and may not have a credit score with which to apply for borrowing. Instead, GoCardless uses what it knows about their recent trading – based on months of detailed payments data – to decide whether the business is a good risk.

In practice, the initiative does not require GoCardless to take on any of this risk itself; that’s where Pipe comes in. The US fintech receives anonymised customer data from GoCardless and uses its technology to automatically assess which of its partner’s small business customers are suitable for pre-approved loans. It also supplies collateral such as banners and emails that GoCardless can use to tell customers they’re eligible, and provides the funding where loans go ahead.

It’s a valuable arrangement for GoCardless, Victor says, helping the payments company to build closer relationships with small business customers. “We look forward to fully launching this embedded product next year, helping customers tap into new opportunities for growth and expansion while continuing to build their trust and loyalty in [us],” she says.

Embedded finance deals of this type are hugely popular in the US, with platforms such as payments company Stripe and ecommerce specialist Shopify now among the country’s biggest lenders to American small businesses. At Pipe, CEO Luke Voiles suggests something similar is possible in the UK.

“I think the potential market here is off the charts,” Voiles says. “It’s a super-friendly product for small enterprises, requiring no personal guarantees or credit score.” Pipe can use these companies’ payments data to make very accurate forecasts of their future financial performance, he explains, limiting the risk that its exposures represent.

GoCardless and Pipe hope to gain traction quickly in a market where small businesses report a range of capital financing needs, from business growth imperatives to cashflow shortages. One in six enterprises in the UK say they are on the look-out for financing for purposes such as investment in new premises, stock expansion and dealing with late payments, a major problem for many small businesses.

The two companies’ initial work suggests embedded finance deals of this type can make a splash in the UK. “The early results have exceeded expectations with almost £7 million in capital being advanced,” says GoCardless’s Victor.

Pipe expects to repeat the model with other partners in markets worldwide. “It makes sense for everyone involved because this is a simple way to solve their customers’ pain points,” adds Voiles.