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PayPal Set to Expand its SMB Lending Working Capital Program

January 10, 2014         By: Kevin Xu

PayPal is ready to launch its small business loan program globally.

The program, called Working Capital, was on a three-month trial and offered 90,000 of select merchants to participate.

Working Capital allows businesses to take out a loan of up to 8 percent of their yearly revenue processed through PayPal. The loans are currently limited to $20,000.

According to Darrell Esch, vice president of small-business lending at PayPal, there are plans to introduce Working Capital globally, and perhaps double the maximum loan to $40,000. Merchants pay back their principal with deductions on their daily receipts, which range from 10 to 30 percent.

Working Capital is unique in that PayPal charges one flat fee depending on the amount of the daily deduction, and charges no interest on loans. Higher deductions grant a smaller flat fee. The advantages include nearly instant funds transferred to PayPal accounts, no deadlines for paying back the loans, and the absence of miscellaneous fees.

If it seems PayPal is taking huge risks in offering this program, and especially in its plans to go global, the truth is the risks are minimal. PayPal chooses which merchants to offer this loan program to, usually to those who have a good history as a merchant through PayPal.

More than 4,000 merchants have taken out Working Capital loans, with most loans going toward paying for inventory. These loans may benefit small-business owners, who may not be approved by banks and need another source of capital.

Another offering by PayPal named Bill Me Later, which targets consumers, allows customers to purchase items online and pay for it later if they pass a credit check. Interest is not charged if paid off in less than six months. The CFPB is investigating Bill Me Later and parent company eBay, which may indicate that Working Capital will receive some scrutiny as well.