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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Oct 2, 2013

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Businesses are offered more options for funding than ever before, but a new loan program from PayPal could impact the business funding economy more than small alternative lenders ever could.

The program, called PayPal Working Capital, requires a single fixed loan fee but does not charge interest payments. Furthermore, borrowers repay their business loans only when they have sales. Repayments are based on a percentage share of PayPal sales and occur automatically.

Contrary to traditional bank loans that charge interest fees and strict monthly payments, this new program works more fluidly, charging more or less depending on the businesses’ success.

It was launched early last week and several experts have already voiced favor of the new type of business lending.

One fan of the new program is Amore Black, creative director of Apples and Oranges Public Relations. She said that it is a positive alternative to traditional banks.

“The fact that there’s no interest charge is great for businesses,” she said.

Limited Business Capital

Small businesses are a fundamental part of the country’s economy, but lending is oftentimes limited or restricted.

This is one of the reasons why the new business loan program was created.

A PayPal spokesperson released a statement to saying that the company focused on small business lending because oftentimes these loans are “out of reach” for most potential borrowers.

The total amount of business loans lent has been on the decline in recent years. The Federal Reserve Bank of Cleveland found that the total value of small business loans in Q4 2012 was 78 percent less than in Q2 2007.

“This is a problem that is acutely affecting small businesses,” the PayPal spokesperson said.

The program should be running and distributing funds in time for the holiday season, a crucial time period for many small business owners. This season will allow for PayPal’s unique repayment model to be implemented.

When a borrower applies for one of these PayPal loans, they choose a repayment method. For example, borrowers can choose to repay 15 percent of their PayPal sales in order to pay a lower initial fee. Conversely, if the borrower wants to pay a higher loan fee, they will owe a small sales-based percentage to PayPal.  If a business does not experience sales on a certain day, they will not make a payment towards the loan balance.

Since the loan repayment is taken immediately from a PayPal sale, it adds protection against bank overdraft fees. Put simply, the program eliminates any chance of surprise.

“A flat fee allows borrowers to know exactly, to the penny, how much their loan will cost them, no matter how long repayment takes,” the spokesperson said. “A borrower can pay off the exact amount of the loan, with no surprises, at a rate that works with the needs of his or her business.”

Andrew Schrage, founder and CEO of Money Crashers, is a fan of several program elements, especially the sales-based repayments.

“That aspect of PayPal’s financing program should provide to be a significant selling point for a new small business and those that just aren’t yet to the level of having steady and solid revenues and profits,” he said.

Access to capital is a crucial element of a small business’ success. Owners need this capital without an unnecessarily lengthy application process.

“[Business owners] generally know the amount of financing their business can handle, and don’t need a bank dictating that to them,” Schrage said.

Black said that business owners don’t want to commit to fees and services required by traditional business loans because the owners remain unsure of what their future sales will be.

“If you don’t make anything, you don’t pay anything,” she said, explaining further that it works the opposite way as well. “If you know that you have $100 coming in, you can make a loan payment of $15.”

This option is simply unavailable with traditional lending methods.

“On a month that you have no sales you can’t call the bank and say you didn’t make any money,” Black said.

New and Varied Loan Options

The program is a part of a recent rise in alternative lending and funding formats, such as microlenders and crowdfunding, which are diversifying lending options for small business owners and the often-ignored startups.

Black said that PayPal’s program is a reflection of the needs of the business economy.

“This is an answer to what is going on in the financial industry,” Black said.

Alex Cohen, CEO of commercial real estate finance company Liberty SBF, said that this new form of lending is not surprising due to the recent popularity of alternative and micro lenders.

“There seems to be a rush by venture capital and tech companies to invest in companies that are changing the landscape of payments and lending,” he said.

Cohen said that one major hurdle for new alternative lenders is developing new businesses and scaling the business for a larger customer base.

“PayPal would seem to have access to tremendous web traffic from small businesses and thus a lot of potential customers, and they have an established, trusted brand,” he said.

Despite their likely success, Cohen does not believe they will be a threat to major bank lenders. He said it will be challenging for PayPal to delve into larger loans reaching past $150,000.

“These alternative lender programs will influence the larger lending market, but I am not sure that PayPal has any interest competing for larger loans,” Cohen said.

Schrage is also unsure if the new program poses any real threat to traditional business loans.

He said the ease of access and user-friendly aspects could lead to an upswing in small business lending, but if too many rules are broken in the program, the borrower must repay the loan immediately.

“It could hamper the long-term success of the program,” he said. 

PayPal said initial customer feedback has been positive and they are planning a limited, exclusive release to further gauge merchant interest.