Alternative lending for small businesses has become popular in the drought of banks loans. So popular, that the PayPal giant has gotten into the game. Although the alternative small business market is getting crowded, name recognition gives PayPal an advantage in the market. Also, it’s familiarity with online transactions works in its favour.
Small businesses can borrow up to 8% of total transactions it conducted through PayPal over the past year with a $20,000 maximum.
PayPal Working Capital
PayPal named the new program “PayPal Working Capital”. This is a version of a “Cash Advance” that is available from other lenders. There is no set monthly payment. Instead, payments are automatically taken each time a customer makes a payment to the business using PayPal. When business is good, a larger payment is made. When business in down, the payment is less.
PayPal is rolling out a limited version of the Working Capital program. Through the remainder of 2013, 90,000 selected businesses will be offered Working Capital loans. PayPal plans bringing a full version to market in 2014.
The longer a business has had a PayPal account, the more information PayPal has to base a decision about making a loan. The decision is base solely on PayPal data. No credit check is made. This means a loan can be funded in just a few minutes.
A Sliding Loan Fee Scale
PayPal claims its loan costs are fully transparent with no hidden fees or charges that other lenders have been known to include. However, that doesn’t mean these loans are inexpensive compared to a bank loan. Called a “loan fee” there is no set interest rate since the loans are not for a set amount of time. They are repaid as customers make payments to the merchant’s PayPal account.
The sliding scale varies from low of 10% of each PayPal payment up to 30%, with other increments in between. Since paying 10% will, take longer to repay the loan, the loan fee is much higher at £947 compared to a loan fee of £281 when 30% of each PayPal payment is applied to the loan balance.
Specifically, the way it works is if a merchant takes in £1,000 per day in PayPal sales and is repaying the loan from 10% of each sale, the daily payment to PayPal will be £100. At 30%, the payment would be £300.
Not For All Businesses
While this is an alternative source for needed working capital, these loans are not for every merchant wanting to raise money. The wise thing to do is clearly understand your profit margin and the percentage of your business that is typically conducted through your PayPal account. If only a portion of your sales go through PayPal and your profit margin is above 10%, these loans can work for your business. If a high percentage of your sales are through PayPal and your profit margin is at or below 10%, you won’t be making any profit until the loan is repaid. Give this some serious thought. Other alternative types of financing may work better for your needs.