Access to capital continues to be a challenge for many startups, micro enterprises and small businesses. Responding to the lending void faced by many of the merchants who use its payment system, PayPal launched a loan program in the U.S. called PayPal Working Capital. PayPal just recently expanded its Working Capital services to the U.K.
Since its launch last September, more than 20,000 U.S. businesses have collectively borrowed more than $150 million in PayPal Working Capital business loans through lending partner, WebBank. Thousands of businesses have successfully applied for PayPal Working Capital, including a number of repeat customers.
PayPal loans have proven to be beneficial to small business owners who have had trouble being approved for loans by traditional commercial banks. Because the program uses a business’s total sales and history using PayPal’s payment system, there is no credit check or extensive documentation required.
The only term is that PayPal requires merchants to be generating at least $20,000 in sales revenue over a 12-month period on its payment systems at the time they apply for a loan. PayPal also will inquire about the purpose of the loan. Not surprising, most PayPal loan borrowers are using the funds for inventory, others for advertising.
Borrowers can take out a loan amount that is up to 8% of their yearly revenue processed through PayPal, with loans limited to $60,000 (up from $20,000 last year). To date, about 60% of PayPal loans ween to eBay sellers.
Funding is approved (or not approved) within minutes of applying through a simple online interface. Funds are transferred to PayPal accounts (that can then be transferred directly into a business bank account), no miscellaneous fees, and no deadlines for repaying the loans.
Paypal loans are unique in that business owners are allowed to pay back the loans based on a percentage (typically 10%-30%) of daily sale receipts. On those days the business doesn’t have sales then the business owner doesn’t have to repay the loan. The loan charges a single flat fee of the daily deduction amount (chosen by that merchant) with no interest charged. So, businesses know the cost of the loan up front.
The repayments are made automatically, business owners don’t have to worry about managing the repayment process. This eliminates the risk of missing payments, which can often result in a cash penalty.
The PayPal Working Capital program is meant to help online retailers grow their businesses. A downside is that those business owners who aren’t using PayPal have no chance of getting one of its loans.
PayPal is competing with other online services such as Kabbage, which advances online merchants money and even uses their PayPal histories, among other things, as part of its credit profiling and screening process. Another payment platform, Square is offering cash advances to businesses in its network.