PayPal’s captive small business lending program

I’ve personally used Paypal and have found them to be useful for a small business that does not want the hassle of becoming a credit card merchant but still wants the ability to take credit cards without a bank credit card merchant agreement in place.

I have found their fees to be high, both their transaction fees and their exchange rates when they move money between currencies.  There’s a price to pay for convenience.  So when I heard about PayPay’s Working Capital pilot program, I was interested to see how this was going to work, especially since PayPal cannot legally make loans to its merchants directly (it’s not a regulated bank).   PayPal recently conducted a pilot working capital program for its merchants from September through to December 31, 2013.  The program is being administered through Salt Lake, Utah-based WebBank, which also partners with PayPal’s BillMeLater.

The pilot offered 90,000 of the company’s merchants the option of borrowing as much as 8% of their annual PayPal volume up to a maximum of $20,000.   PayPal charges a set fee that is repaid automatically as a deduction of 10-30% of incoming receipts until the balance is paid. The greater the percentage of payback, the lower the fee will be.  With the repayment occurring as an automatic deduction, there’s no repayment process for the business owner to manage, eliminating the risk of late or forgotten payments or fees.

In the company’s published example, the fee is as low as $281 for a loan of $8,000 (3.25%) with repayment of 30% of receipts or as high as $947 (11.83%) with repayment of 10%.  The website claims there is a single, fixed fee that you'll know before you sign up. NO periodic interest charges, penalty fees or any other fees, so you know what you'll pay, down to the penny.

On this example, for a small business with $100K of annual PayPal transactions ($273/day), and a loan repayment of 10% of PayPal sales, the repayment is $27.30 / day.  At this rate, it will take 292 days to pay back the loan for an annual percentage rate of 24. 6%.  

If and when Google, Amazon or the Government starts leveraging their captive audience, things could get mighty interesting.

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