PayPal Introduces Small Business Loans
As tight bank credit and rising interest continues to stifle traditional alternatives for small business loans, a new offering from PayPal has entered the mix.
Called PayPal Working Capital, the new program is offering 90,000 of the company’s merchants the option of borrowing as much as 8% of their annual PayPal volume up to a maximum of $20,000. PayPal charges a set fee that is repaid automatically as a deduction of 10-30% of incoming receipts until the balance is paid. The greater the percentage of payback, the lower the fee. Merchants can apply for a new loan as often as needed as the balance of the prior loan is paid off.
Why would PayPal do this? On the face of it, the program makes good sense for PayPal: The company is well secured as it extends credit only to existing customers that are already demonstrating healthy cash flow. The program is easy to understand and easy to implement. The cost to the entrepreneur is presented as a single number, with no additional costs for set up and no prepayment fees. With the repayment occurring as an automatic deduction, there’s no repayment process for the business owner to manage, eliminating the risk of late or forgotten payments or fees.
In the company’s published example, the fee is as low as $261 for a loan of $8,000 (3.25%) with repayment of 30% of receipts or as high as $947 (11.83%) with repayment of 10%. PayPal is amply covered, of course, as the company is already in control of the merchants’ incoming receipts, a factor that also gives PayPal inherent access to online sales history for its merchants as the revenue flows through the transactional coffers.
Armed with this intelligence, PayPal can make a decision and approve a loan within minutes, with no credit check.
For now, the program is exclusive to the 90,000 existing merchants invited, through invitation via phone, email, direct mail or online account notification, and the loan amounts are small, not exceeding $20,000 (which would equate to 8% of annual PayPal revenue of $250,000 per year).
The offer expires at the end of the year, but PayPal expects to launch a larger version of the program in 2014, said company representative Darrell Esch (a former Bank of America exec), after the company evaluates the initial program’s results. As PayPal cannot legally make loans to its merchants directly, the program is being administered through Salt Lake, Utah-based WebBank, which also partners with PayPal’s BillMeLater.
This is all good news, yes?
In the respect that loans to entrepreneurs have fallen dramatically since the Great Recession, this new program can help to fill the seemingly insurmountable gap. (Current loans outstanding were at just 78% of 2007 levels in the fourth quarter of 2012, according to data from the Federal Reserve)
Lack of funding for small business is actually hampering economic recovery, according to policy analyst Ann Marie Wiersch.
The move puts PayPal directly into the sites of traditional banks, says Nick Holland, Sr. Analyst of Javelin Research. In an interview with American Banker he cautioned, “Financial institutions should be scared. PayPal has the audacity of a startup with an R&D budget that outguns the incumbents.”
But unlike a bank, PayPal has direct and intimate access to the lifeline of the business—the financial data about the company’s sales and even the physical access to the incoming receipts and to the PayPal accounts to retrieve payments, giving PayPal an informational edge that bankers are lacking and a repayment advantage that Merchant Cash Advance providers can’t match.
If the program is successful it will fulfill a needed purpose for online retailers who have thus far been one of the sectors that is having the most difficulty in achieving traditional loans.
However, the loans will bring no benefit to small companies who aren’t transacting their business online, which could produce yet another source of negative pressure on traditional ventures who are increasingly losing business to ecommerce sales.
For online merchants, their increasing dependence on a single provider—PayPal—could also have negative implications for the ecosystem they work within down the line. How are small businesses responding to today’s news? Several online merchants I queried noted that the loans will be a non issue for their businesses as they aren’t using PayPal, and the access to a loan of this size would not be reason enough to convert. In response to ecommerce expert Ina Steiner’s recent question “Would you be willing to turn to eBay’s PayPal Unit for a Loan?” all but one of her 37 respondents said emphatically “no,” citing reasons that ranged from conflict of interest to concern over PayPal’s efforts to legally circumvent being classified and regulated as a bank.
What about your own business? If you qualified, would you accept a small business loan from PayPal? And what would your company do with $20,000 of additional cash? I look forward to hearing your thoughts.
Tagged under: Business Trends, Ecommerce, Financial institutions, Small Business, Great Recession, WebBank, Bank of America, email, merchants, entrepreneur, Working Capital, Small Business Loans, PayPal