B2B Payments

Why PayPal Working Capital Was A No-Brainer

PayPal Working Capital is now lending $2 million a day in the United States alone. In total, the 18-month-old small business loan program revealed this week that it has lent $500 million to 40,000 businesses across the globe. Primarily serving small- and mid-sized businesses, the program’s success underscores the still unmet funding needs of SMBs.

Small Beginnings

Launched in September of 2013, PayPal Working Capital began as an invite-only program, with a $20,000 maximum loan amount and limited to the U.S. Today, SMEs can access up to $85,000, and the service has extended to Australia and the U.K., where loan amounts will also increase. According to Darrell Esch, vice president and general manager of small and medium-sized businesses at PayPal, 90 percent of borrowers are repeat customers, with the most common uses of capital being inventory finance, workforce growth, new product development and improved cash flow.

Unlike credit cards or traditional bank loans, PayPal Working Capital loans are funded within minutes without a credit check. Eligible businesses must process payments using PayPal for at least three months and do more than $20,000 in PayPal sales over a 12-month period. Loans are repaid through a daily percentage of a borrower’s daily sales. PayPal cannot directly lend funds. Working Capital loans are processed by Web Bank, a Utah-chartered Industrial Bank. Web Bank also handles the consumer-side lending program PayPal Credit (formerly Bill Me Later).

The Split From eBay

The team at PayPal, the fast-growing division of eBay, will soon have more time to focus on expanding its small business offerings. The payments business is set to split from the online marketplace before the end of the year. PayPal may be the more valuable of the two. In 2013, PayPal made up 41 percent of eBay’s total revenue and 36 percent of its profits. In a statement describing the decision to separate the companies, John Donahoe, CEO of eBay, said, “a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively. The industry landscape is changing, and each business faces different competitive opportunities and challenges.”

More than once, Donahoe said he would split the companies when the time was right, but the final announcement that the two would separate followed public pressure from vocal, high-profile business personalities, including activist investor Carl Ichan and PayPal cofounder Elon Musk. As more companies enter the payments space, a standalone PayPal can dedicate more time and energy on preparing for the impending battle for mobile payment dollars.

A Unique Position

PayPal is not the only payment service innovator to recognize the power of small business lending. Square Capital, part of the payments startup Square, has loaned about $100 million to 20,000 merchants in its first year of service, CEO Jack Dorsey recently told BuzzFeed. While Dorsey declined to reveal how much of the $100 million had been paid back, he did share that 80 percent of users take a second advance. Square has made a push for small business, launching P2P payment services and introducing instant deposits and disputed purchase protection. The moves show Square becoming a service provider for small business serving as a cache for sales data.

Bill.com is also considering a move into finance. According to the San Francisco Business Times, while at a business dinner the company’s CEO René Lacerte, said Bill.com is open to the prospect of leveraging client data to provide financing, most likely with a lending partner. These shifts into small business lending signal not only the gap SMEs face when seeking cash flow, but also the unique position of payment service providers to enter the SME lending arena: with established small business relationships and an existing understanding of their financial struggles, it’s a no-brainer for payment innovators to provide lending services, too.

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