In 2013, two years before it spun off from parent company eBay, PayPal began offering small business loans in limited amounts to its customers. Four years later, PayPal has written over $3 billion in loans to more than 100,000 small and medium sized businesses (SMBs) in amounts of up to $125,000 for each loan.
In early September, it was announced that PayPal would be purchasing Swift Financial (subject to regulatory approval). The smaller startup writes loans of up to $500,000 to its clients and has written around $1.5 billion since 2006 when the company was founded.
Why is PayPal making this move?
The online payments market is fierce. While many people who need to send money between individuals use PayPal, the market for online payments accepted by businesses is much broader. The number of reliable online nontraditional lenders has also increased.
PayPal has seen itself compete with lenders like Square and Kabbage, all of whom offer funding to SMBs. Experts believe that PayPal is making this move to signal that it is taking the competition seriously and that it is driving to become a more serious competitor in the SMB lending market.
Why pursue alternate lending?
After the financial crisis of 2007 and 2008, the largest banks refused to write loans to “risky” borrowers. Risky often included small or medium-sized businesses, especially those owned by women or minorities.
While borrowing eventually resumed to some degree, traditional lenders have not recovered from their concerns about smaller, riskier companies. Businesses like PayPal and Swift Financial, among others, have stepped into that gap to make necessary credit open to businesses that are unlikely to get a loan from a traditional bank or credit union.
Why do SMEs borrow from PayPal?
There are several major reasons that companies choose to look to PayPal or other alternative lenders for their working capital needs.
- Traditional banks are unwilling to write loans to the businesses, feeling that the company is too risky for a loan.
- Traditional banks are not willing to write a loan for a smaller amount of money; SMBs rarely need huge amounts of capital, and banks may feel that they will not get a sufficient return on their investment.
- The company may not have a long enough operation history to qualify for loans or other funding through the Small Business Administration.
- The process of applying for a loan may be too daunting for a small company to complete.
- The timeframe for a loan through a traditional bank or credit union may be too long for the money to be helpful to a SMB.
For any one, or many of these reasons, a company may find an alternative lender to be a better choice for seeking out business funding, even though interest rates may be higher and terms may be shorter.
Chief Executive Linda Lightman spoke to news outlet CNBC about her experience securing a small business loan from PayPal. According to Lightman, borrowing from a bank was a cumbersome, long process. With PayPal, she said, the company already understood her business because it had been processing their payments. Securing the needed funds for her business took a day.
Traditional banks often use a wide variety of sources to determine whether or not they will lend to a SMB. They may want to see invoices, statements, proof of other debt, proof of asset ownership, credit history, credit scores, and much more. All of this is necessary for banks to get a solid understanding of the business that wants to borrow money from them.
But because of PayPal’s ability to both process payments and lend funds, the financial company can quickly get a full picture of a business’s overall health. This allows it to make rapid funding decisions. When companies need to get capital quickly, PayPal is there to help.
The acquisition of Swift Financial will allow PayPal to offer more funds in its loan products. By lending amounts up to $125,000, PayPal has been focusing on the smallest businesses. With the additional resources and relationships of Swift Financial available, PayPal is expected to increase its lending ceiling to $500,000 on each loan. This will allow it to target larger small businesses as well as medium-sized businesses.
There are many different reasons that companies need working capital; from seasonal purchases of inventory to payroll costs to get through lean times to creating expansion opportunities when feasible, one business truism is that you must spend money to make money. While this may be simplistic, it does also play out in a capitalist environment. SMBs often lack the necessary funding to see their company expand; gaining options to grow their company in a steady, responsible way is a positive decision.