Small Businesses Get Working Capital Boost From Payments Platforms

small business

It’s a given that smaller businesses have a hard time getting the capital they need.

As noted here in recent PYMNTS coverage, big banks’ approval rate for business loans dipped to just below 15%, a 10-month low. And as we found in the recent report “Digital Banking Rises to Meet SMB Needs,” 24% of small and medium-sized businesses (SMBs) are concerned with finding affordable funding, creating an existential threat for many owners.

The gap is being filled through digital channels, and increasingly, by platforms where merchants onboard to serve their end customers, to facilitate commerce online and offline. The platform model serves as a good springboard for forging a strong ecosystem for smaller merchants to tap the funding they need. The platforms themselves have the data on transactions and merchant growth that can help increase confidence in underwriting risk. And there can be payback mechanisms tied to sales — where daily repayments can be debited from the merchant based on daily sales.

Working Capital Loans Gain Momentum

The recent earnings results and data from filings from the likes of Shopify and PayPal underscore the appeal of these loans for merchants.

In its earnings reported this week, and as detailed by PYMNTS reporting, Shopify has said its Shopify Capital offering is available in four countries — and said, too, that in the latest quarter it advanced  nearly $400 million, up 21% from the same period last year. The cumulative amount advanced to merchants since the launch of Shopify Capital in 2016 now comes to nearly $4.7 billion.

In remarks to analysts, Shopify President Harley Finkelstein said that the capital offering has “acted as a lifeline for merchants, especially through the pandemic and this tough macro environment, allowing them to conveniently access capital when they need it most.” He noted that more merchants accepted Capital in Q4 compared to the same period last year, “including a greater number of Plus merchants.”

As for PayPal, though the latest earnings call did not break out activity related to its business lending and working capital programs, delving into the company’s SEC filings shows that its merchant financing business shows merchant loans, advances, and interest and fees receivable outstanding at $2.1 billion at the end of last year, up 48% from the previous year. “The increase in merchant loans, advances and interest and fees receivable outstanding was due primarily to growth in our PayPal Business Loan products in the U.S.,” the company said.

And the vast majority — about 86% of the receivables — were tied to U.S.-based merchants.

In terms of the mechanics of the loans, PayPal noted the funds are advanced for a fixed fee and based on merchant’s annual payment volume processed by PayPal. Additional details from the company’s second-quarter results give a snapshot of working capital demand from SMBs. The company said that PayPal Working Capital (PayPal Funding Pro) had expanded to France and the Netherlands. And in that update, the company said that since PayPal Working Capital launched in 2013, the company had provided SMBs access to more than $25.6B in capital through over 1.3 million loans in the U.S., Australia, U.K. and Germany, per company filings.

The banks may be hesitant to lend — the platforms are stepping in to fill a void.