PayPal Puts Holiday Cash In Merchant’s Wallets

All merchants know the holiday shopping season is their bread and butter, but prepping for holidays brings along high product investment costs. PayPal and Square want make the loan process easier for its customers, Bloomberg reported.

For merchants already using PayPal to process payments, using the service for a cash loan may ease a burden quickly. Jeff Caruso, owner of Crisloid Products, told Bloomberg he was already using PayPal for that reason, so taking a $12,000 loan to get his merchandise set for the holidays was an easy move. The five percent flat fee and flexible terms allowed him to repay the loan using some of the sales instead of having a structured timeline like a bank loan.

“PayPal takes the scare factor out of borrowing,” Caruso said. “There’s always hiccups when you’re growing.”

This small-business trend of using PayPal and Square for loans is becoming a popular option around the holidays. In addition to aiding merchants financially, PayPal and Square can provide data as to what their customers need most out of their companies. PayPal’s merchant-lending began in September 2013; Square started in May of this year.

“The companies have extended more than $275 million in financing to about 40,000 merchants over the past year, with demand for loans spiking when businesses need to build up inventory for the holidays. In the process, PayPal and Square are encroaching on the turf of banks and other lenders,” Bloomberg reported. “The companies make pre-screened loan and cash-advance offers to select merchants based on their sales histories.”

As the mobile payments competition heats up, PayPal and Square work to stay relevant, particularly to its merchant base. They haven’t released figures about how much merchant-lending provides them, but David Goldin, president of the North American Merchant Advance Association, told Bloomberg that giving merchants cash advances is a $3 billion industry. In terms of fees, the cost of borrowing money is quite higher than the cost of processing transactions. PayPal’s loan fees are as high as 12 percent, whereas processing fees run around 2-3 percent. Square’s cash advances rage from 10-14 percent, and the cost per transaction is also between 2-3 percent. Merchants must also stick with the payment processor until the loan balance is paid off.

“PayPal and Square say they are choosy about who receives credit,” Bloomberg said. “The requirement to continue processing payments with them until the balance is recouped minimizes risk, as well as the per-sale payment system, which decreases the chances a merchant skips a large monthly payment, they said. Merchants accepting the cash say they get the money more quickly than from a bank and like how they don’t get slammed with a big bill once a month. In exchange, they pay a fee that can translate to annual percentage rates associated with high-interest credit cards and pay-day lenders.”

The only hitch for Square and PayPal could be the logistics of collecting the money back, Goldin told Bloomberg. Although PayPal and Square have been able to build the loan concept because of existing merchant relationships, not knowing how to collect the loan presents problems for the payment processing companies.

“Anyone can fund $50 million a month,” Goldin said. “Collecting that back is a whole different story. This is unsecured working capital to high-risk merchants. They haven’t done this before.”

As for the risks for merchants, Square and PayPal believe the flexibility and convenience of securing the loans outweigh the risks, according to the article. This is because merchants are able to repay the debt from sales and have access to capital at the same time. PayPal’s loan amount is now $60,000 to appeal to bigger businesses, up from the $20,000 limit last year. Building inventory is one reason eBay thinks the PayPal option is good for Merchants.

“We have a lot of small and medium-sized businesses that struggle to get working capital to build inventory,” eBay Chief Executive Officer John Donahoe told Bloomberg. “We have all of their transaction history, so that enables us to confidently underwrite them.”