PayPal Breaks Into Small Business Lending


Since bank lending to small business dried up in the aftermath of the financial crisis, a wealth of financing flavors for Main Street merchants has emerged. There are merchant cash advancespeer-to-peer lenders, and online term loans. There are more esoteric products, such as revenue-based lending, dynamic discounting, or industry specific factoring arrangements. What most of these models have in common: They’re more expensive than bank loans and their terms are harder to understand.

Now PayPal (EBAY) is entering the fray with a small business loan that the company says stands out from other types of alternative financing: It’s simple and relatively cheap.

Starting today, the company will offer certain merchants a product it calls PayPal Working Capital, a bank loan that charges a single flat fee and nothing else—meaning no periodic interest. Merchants can borrow 8 percent of their annual PayPal revenue, up to $20,000. PayPal sets the loan fee, then extracts 10 percent to 30 percent of the merchant’s daily PayPal receipts until the fee is met. (If a business does no sales on a given day, PayPal doesn’t collect any repayment.)

To be sure, not all PayPal merchants will have access to the loans. The company, which is teaming with Salt Lake City-based WebBank to provide financing, can offer attractive rates because it’s confident about its assessments of borrowers. “We’re involved in the cash flow of these merchants,” says Darrell Esch, an executive at PayPal. “Our experience with the sellers gives us a great vantage point to make solid decisions.”

Esch says PayPal will offer loans to about 90,000 merchants, a small percentage of the company’s merchants, from now until the end of the year.

This isn’t the first time PayPal has dabbled in lending. The company has offered consumers credit for years. Earlier this year, it experimented with offering cash advances to businesses in the United Kingdom. Amazon (AMZN) has tried offeringworking capital to companies that sell on its site.

“We think this is a very natural extension of the business we operate today,” says Esch. “We’re in the business of helping merchants fuel commerce. Strong merchants make a strong PayPal.”


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