The Great Recession had a crippling effect on credit markets across the board. Consumers, enterprise-sized businesses and small businesses (SMBs) all found themselves caught in the squeeze of a wide-ranging credit crunch.
Ten years out, consumers and big businesses experience the credit crunch as a memory, but for SMBs, particularly startups, the credit crunch is a reality. According to a report by the country’s 12 regional Federal Reserve banks, over half of all startups report difficulty in securing loans, and 81 percent report having had to dip into their personal funds to cover gaps in their corporate cash flow. Startups, as defined by the new report, are firms that are less than two years old employing less than 500 workers.
“[Access to credit] is especially critical to these young firms who need funds to weather initial costs and grow,” Claire Kramer Mills, an assistant vice president at the Federal Reserve Bank of New York, said in a statement. “Despite startups’ strong demand for financing, their problems are more acute than other firms, with most facing shortfalls and many discouraged from even applying.”
Nature abhors a vacuum, and commerce has similar feelings. Small businesses and startups need to grow — and online lenders of varying stripes have grown up to meet that need. Once easily categorized as “the alternative financial services players” through white labeling, partnerships and acquisitions, these alternative online lenders are very much becoming part of mainstream operations.
And in that context, PayPal’s just-announced acquisition of Swift Financial, as it moves to expand the purview of its PayPal Working Capital program, strikes a distinct chord. Through the acquisition, PayPal will be able to offer larger loans to larger businesses that process payments through its platform and businesses that are not yet users of its services, the company said on Thursday.
PayPal has been offering short-term loans to its smaller merchants via Working Capital since 2013, when it began as a “skunk works” project to see how merchants might respond. And they did. Working Capital leverages the front seat view that PayPal has into their merchants’ businesses to assess their creditworthiness — and their ability to pay back a loan. PayPal can see how long those merchants have been in business, how active their sales are, how big their sales are and how much and how fast they are growing over time. For a merchant, that means sidestepping the 24 hours it takes to fill out paperwork for a bank loan — only to be told weeks later, thanks but no thanks.
By adding Swift Financial to its lineup, PayPal adds to the capacity of a firm that has lent over $3 billion to 115,000 small businesses in loans of up to $125,000 since its inception. PayPal, building on that capacity, will be able to offer loans of up to $500,000 to its larger merchants and take advantage of Swift Financials’ data capabilities to lend to companies that may not be long-time users of its services. Plus, PayPal can do what it most wants to: meet more of the needs of its customers.
“This is an area where customers have been asking for more,” Darrell Esch, vice president and commercial officer of Global Credit at PayPal, said in an interview.
But are such customers looking for more?
Linda Lightman — once an attorney, but for the last 17 years the proprietress of a thriving eBay store-turned standalone consignment eTailer on the internet — was one of the recipients of a PayPal/Swift Financial loan this summer. Lightman talked to Karen Webster about what it meant to her business, Linda’s Stuff — a luxury online consignment shop — before it became every venture capital’s (VC) retail rockstar.
The Path to a Consignment Powerhouse
Seventeen years ago, few of us have anything all that notable to point to — maybe you got your first flip phone, perhaps you were sporting the Rachel haircut and more likely than not you were first starting to understand the concept of prestige drama with The Sopranos.
Linda Lightman was at her kitchen table, taking pictures of her kid’s video games and getting ready to sell them on eBay, because she and her family were tired of getting $5 back on games that cost $60 locally. They were shocked to find that they were not just doing a little better on eBay, in some cases they were getting most of the face value of their games back.
But that lasted as long as the video games that her kids were willing to part with did. So, Lightman — a self-professed shopaholic who had already decided not to return to the practice of law — began selling her designer clothes, shoes and accessories on eBay as well. It was then that Lightman said she found her calling.
“I was selling my treasures because I was always the person who found great bargains, who people would ask where I got stuff [from],” Lightman told Webster, “and now I got to do that [with] people from all over the world. People started telling people about what I was doing … word of mouth is an incredibly popular tool, and before I knew it, I had a business.”
Well, to be precise, she and her entire family had a business.
“I was taking pictures, writing copy, shipping the goods,” Lightman said. “My kids would come home from school, and I would pile boxes in their little hands and send them to go ship for Mom. My husband was a stock trader at the time, and he would end his day with the market and then come to work … with me, too.”
The family affair grew and eventually became a cottage industry that employed art students for the product pictures and English majors for the copy. Then, it quickly became apparent that the cottage industry was taking over their entire cottage. It was time to think about expanding to some storage space that wasn’t also a living space.
“First, we moved to a 5,000 square foot space, then a 12,000 square foot space, then a 68,000 square foot space — but we had to renovate that, so now we are at 93,000 square feet. You really have to see it; it is hard to imagine the scope and the scale,” Lightman said.
Linda’s Stuff is also at 110 employees — a far cry from the days in which her kids were her conscripted workforce — and is shipping all over the world.
So, happily ever after right?
The Art of Competing with Cash Flow
Linda’s business truly grew from a kitchen table on up organically. Her firm never took a loan or got any kind of VC funding for their efforts. The good news about being a pioneer in a vertical is that one gets to operate alone for a while — and set the rules. But online consignments — particularly at the huge scope and scale with which Linda is working — has attracted lots of contenders for the crown, some of whom come with some pretty impressive pocket books.
“You have so much VC money being thrown at all of these businesses that recently the competition has really crept up. These are firms that are casually snapping up $5 million or even $20 million at a time. We just don’t have any of that,” Lightman explained.
Two years ago, she noted, she and her husband realized it was time for the company to make some technical upgrades to stay competitive in their more crowded field — and found that just going to a bank, despite 17 years with a profitable, growing business, was not an option.
“Banks are traditional, and, as a consignment business, we don’t own that inventory,” she said, adding that the consignment business model doesn’t sync with banks’ traditional underwriting mold. Even though, Lightman said, after over 17 years, Linda’s Stuff has evolved from getting couture fashion from women who don’t want to be seen twice in the same outfit, to getting goods directly from designers, manufacturers, small — and even some huge — retailers. They’ve all chosen her distribution platform because, she says, Linda’s Stuff can get them close to retail value and an audience that can be found nowhere else.
What should have been a compelling story for a lender is a little too outside the mold, so a loan wasn’t in the cards.
PayPal, which the company had worked with since its earlier days as an eBay store, on the other hand, had a different reaction.
“We heard about Working Capital and called PayPal,” Lightman said. “They told us that since they know us — our business and how well we’ve done — they’d extend working capital to us. We completed an online application, and our loan was approved immediately.”
Lightman said that the loan will be paid off by the end of the year.
Starting and running a small business will never be easy work, but entrepreneurs like Linda Lightman (and her entire family) sign up for working hard. But that work can become impossible without the financing to grow, change and adapt — to help those SMBs turn into bigger ones.
PayPal, now with Swift Financial in their quiver, says it wants to offer more SMBs that fighting chance.
Much to the delight of Lindas everywhere.