Small Business Lending

Overview
  • Securing financing and loans can be difficult for small businesses, especially young businesses or those that are woman- or minority-owned.
  • Access to capital is a key indicator of business success.
  • PayPal is working to opens doors for young entrepreneurs with insufficient or inadequate credit ratings that might disqualify them from traditional lending through its program PayPal Working Capital.
Small Business Lending

PayPal Working Capital has provided $2 billion in funding to more than 90,000 businesses globally since September 2013.

Access to Capital Key to Small Businesses

  • Small businesses play a critical role in the global economy. They hire more people, they strengthen communities and they drive economic impact. Small businesses consistently report access to capital being one of the most important factors in being successful. However, while lending to large firms has largely rebounded since the Great Recession, lending to small businesses is down approximately 20% over the same period.i This gap in access to capital can disproportionately hit businesses that are young and/or woman- or minority-owned.ii

PayPal Helps Small Businesses Compete in the Marketplace

  • At PayPal, we see it as a privilege to empower small businesses by providing financial services and tools that help them compete in the marketplace. PayPal Working Capital (PPWC) aims to fill the gap in access to financing, using innovative and relevant data to enable better and quicker decisions about a small business. PPWC is currently offered in the U.S., UK and Australia. Alternative methods of accessing capital, like PPWC, open doors for young entrepreneurs with insufficient or inadequate credit ratings that might disqualify them from traditional lending.
    • How it works: PayPal Working Capital is a business loan (U.S. and Australia) or cash advance (UK) of a fixed amount, with a single fixed fee. Eligibility is based on PayPal history and processing volume, not a business or personal credit score like traditional sources. Business owners select a loan or cash advance amount (up to maximum of 18% of their annual PayPal sales) and choose the percentage (10-30%) of their future PayPal daily sales that you want to go toward repayment of the loan amount and the loan fee. If approved, the loan or advance amount is deposited to the business owner's PayPal account within minutes. Payments are applied automatically as a fixed percentage of daily sales until the balance is paid in full – meaning merchants pay more when business is strong and less during slower times. There are no periodic interest charges, late fees, or penalty fees.

Innovation, Transparency in Online Small Business Lending Crucial

  • PayPal Working Capital has provided $2 billion in funding to more than 90,000 businesses globally since September 2013.
    • In the U.S., 25% of PayPal Working Capital loans in 2014 were disbursed to the 3% of counties that have lost 10 or more banks since the 2008 financial crisis.
      • The recipients in these counties saw sales soar by 22.4% from one year to the next, while comparable retail businesses in the U.S. grew by 1.72% over the same period.
      • 61% of PayPal Working Capital loans go to entrepreneurs and young firms that have been in business less than 5 years.iii
    • Approximately 90% of businesses that pay off their initial funding reapply for funding and 85-90% of respondents asked to rate the program on a scale of 1-10 answered with a 9 or 10.
    • More than half of businesses use PayPal Working Capital funds for inventory while others use it for seasonal hiring, marketing and promotion, expansion and cash flow management.
  • PayPal Working Capital differentiates itself from traditional financing options by its speed, ease and transparency. The Federal Reserve found small business borrowers spend almost 25 hours on paperwork for traditional bank loans and often wait weeks or months for approval [link]. PPWC applicants are approved in a matter of minutes at which point the funds are immediately transferred to their PayPal accounts.
  • The International Finance Corporation estimated that SMEs faced approximately $2 trillion global credit gap in 2010. [link]
    • According to a 2014 Harvard Business school study, about 45% of small business owners do not even apply for credit while an additional 18% get discouraged by the process. About 43% of those that do apply get none or only some of the credit requested. The study also found that 80% of small businesses want loans under $500K which aren't profitable for banks. [link]

The Need for Small Business Financing Options Can’t Be Underestimated

  • European Commission survey on access to finance for SMEs in 2013 showed 40% of SMEs identified access to finance as the most pressing problem. Larger SMEs (50+ employees) were more likely to have applied for bank loans than micro-SMEs (1-9 employees) and are less concerned about rejection. [link]
  • 2015 Small Business Credit Survey by Federal Reserve Banks found 63% of micro businesses (<$100K) encountered a financing shortfall, more than any other business size. [link]
    • In the U.S., microloans ($100,000 and under) account for 90% of SME loans.
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Our Vision

Policymakers should encourage innovation and transparency in online small business lending to help close the gap in access to finance and level the playing field. Policymakers and regulators should be careful to differentiate consumer and business loans so as not to penalize small businesses that benefit from alternative financing. There should also be recognition of transparency and innovation in the industry by avoiding putting products in existing regulatory boxes.

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