PayPal Steps Up Small-Business Lending

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pay palE-retailers in need of quick cash can add PayPal to a growing list of non-traditional sources for financing, as mainstream lending to small businesses continues to lag.

The online-payment giant offered 90,000 of its U.S. merchants the option of borrowing 8 percent of their yearly PayPal revenue, up to $20,000, through the Working Capital pilot program. PayPal has extended the program past its initial three-month trial run, with plans to go global and likely more than double the loan maximum, said Darrell Esch, vice president of small-business lending at PayPal.

PayPal charges clients a flat fee but no periodic interest or miscellaneous fees. Clients repay the flat fee and principal by allowing PayPal to deduct 10 percent to 30 percent from daily receipts.

Borrowers are charged a lower fee if they allow a higher percentage to be deducted. For instance, a business owner who has the maximum of 30 percent taken out of daily receipts will pay a $281 flat fee on an $8,000 loan, whereas someone who opts for the 10 percent deduction pays a $947 flat fee, according to a sample PayPal fee chart.

A borrower in the former example would pay an annual rate of 23 percent if the loan is repaid within 14 weeks. That’s higher than the national credit-card average of 15 percent, based on a CreditCard.com survey, but significantly lower than an average payday loan, which according to the Consumer Financial Protection Bureau is 399 percent.

If a small business doesn’t record any sales on a particular day, then nothing is deducted. PayPal promises no hard repayment deadlines, late fees or credit checks.

PayPal can afford not to conduct credit screenings because it essentially cherry-picks its borrowers. The company’s lending decisions are based on financial data it already has on its merchants, from sales history to revenue. After a short vetting process, loans show up almost instantaneously in users’ accounts. PayPal issues the loan, but the actual lender of record is Utah-based WebBank.

Merchants “love that they’re getting money the same day,” Esch said. “They pay only when they’re getting paid.”

PayPal has issued more than 4,000 loans through the program. More than half of borrowers reported using the loan to purchase inventory.

The PayPal service works like a credit card, allowing online consumers on more than 1,000 retail websites to buy goods now and pay later after passing a credit check. Typically, consumers aren’t charged interest if they pay off their debts within six months.