Embedded Lending Platforms Jump as Merchants Seek Working Capital

The payment and commerce platforms PayPal, Shopify and Block have long been developing ecosystems for merchants.

For the small to mid-sized businesses, signing on to some services (such as payments processing) provides an onramp to accessing funding, via capital solutions that can help them meet unplanned expenses, or grow their businesses.

As has been spotlighted by PYMNTS Intelligence and Visa, the advantages of tapping into external solutions are readily apparent. Though the firm “size” for middle market growth corporates — as measured by revenues, in the tens of millions of dollars rather than the hundreds of thousands of dollars — may be larger than might be seen on the platforms, the positive impact is the same. We’ve found that a third of firms surveyed looked used working capital loans.

And given the fact that, as reported this week, the Fed’s October 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices found that lending was getting tighter for smaller firms, the potential is there for digital channels to gain more consideration from would-be borrowers.

Earnings reports from the three platforms offered up some insight into the potential for these capital programs, and quarterly filings with the SEC show how those loans are trending.

Working Capital and Cross-Selling

During PayPal’s most recent earnings call, Alex Chriss, CEO, said that PayPal Complete Payments “is now really the best one-stop shop for merchants to be able to do money in and access to capital.”

The company’s latest 10-Q filing with the SEC noted that its PayPal Working Capital and PayPal Business Loan offerings — collected under the heading “merchant finance” — extends credit to U.S. merchants. PayPal, for its part purchases receivables related to the credit that’s extended. As of the end of the latest quarter, the outstanding balance of the loans and receivables was $1.4 billion, up from $1.2 billion seen at the end of last year.

The company noted in its filings that through the working capital offering, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance. Through the business loan offering, merchants gain access to short-term business financing for a fixed fee.

Block CEO Jack Dorsey said in the company’s most recent shareholder letter that the average Square Loan size topped $10,200. Since the debut of the company’s capital offering for sellers, more than $22 billion has been lent out with aggregate loss rates at less than 3%.

“Sellers who take out a Square Loan grew on average 6% faster than sellers who did not take out a loan,” per the letter. In addition, there’s some cross-selling pollination: Sellers who take out loans, Dorsey said in the letter, use 3.7 Square products, while non-borrowers use 1.5 products on average.

As Dorsey said on the earnings call, “It’s just having an easy option for sellers to potentially increase sales by getting an appropriately sized loan right to their email inbox and an invite to opt into it and then paying back through just making sales to their customers,” adding that the offering “really took off. And it kind of guides how we think about all of our lending products.”

Shopify President Harley Finkelstein told analysts on his firm’s conference call, “We launched our financial services suite, Shopify Finance, which is a comprehensive package that includes products like capital, balance and bill pay all integrated through the admin for quicker access.”

And within the company’s 10-Q, Merchant Solutions (driven by payments but which includes the capital program), accounted for roughly a quarter of the company’s top line. The company’s 10-Q reveals that gross loans receivables were more than $1 billion at the end of the most recent quarter, up from $732 million at the end of last year. Merchant cash advances were $223 million at the end of the third quarter, up from $180 million at the end of the year.