Paypal today announced a new loan program for small businesses that provides simpler and quicker access to capital as well as fixed and predictable costs and repayment schedule that is not tied to a fixed date. The program, while limited at first, is a radical approach to small business financing and one that could shake up the market for small business lending.
Currently most very small businesses (3 or fewer employees) actually get most of their financing either in the form of self-financing or from friends and family or via a line of credit that is tied to their personal credit. Business loans from banks and cash lenders make up a much smaller percentage. You can get some idea of the small business lending landscape in this infographic.
In addition, small business lending has been on a downturn since the economic crash and only this year has shown any signs of reviving. This is particularly true for online businesses where there are no physical assets against which to secure a loan. Recently companies like Kabbage have started to offer loans to these kinds of businesses and have tried to cut down the difficulty of qualifying for this kind of loan. But the costs are still high.
Paypal’s approach with its new Working Capital program is to offer loans that are up to 8% of a business’ annual sales at a flat fee with no additional costs or penalties and no time limit on repayment. The flat fee varies depending on how aggressive the business is prepared to be about paying Paypal back. The program is currently (in this first iteration) only open to invited businesses that are existing Paypal customers. In other words, there is no point applying unless you get an invitation.
Businesses repay Paypal by turning over a fixed percentage of every sale to Paypal until the loan and fee are repaid. That percentage is tied to the fixed fee. The higher the percentage the lower the fee.
So why get excited about a loan program that is invitation only? Because of the possibilities for the future and how it might open up small business lending. If this program were an open program and open to apply for it is inherently far more attractive to most small businesses, especially those that sell online because the cost and payback are predictable and tied to sales rather than time. There is no risk of a poor sales period hurting your ability to repay and invoking penalties or even worse. In addition, there is the possibility that other vendors respond and improve their lending programs in turn.
I strongly suggest you take a look at the program just to see what is possible – and if you are a current online business and a Paypal customer keep an eye out for that invitation. And for everyone else, please read Chris Myers' excellent post about getting capital for your small business.