When Lisa Brooks started her personal chef service in 2010, she was a one-woman business, cooking for three or four families in Charlotte, North Carolina. Demand for her Southern-inspired homemade meals grew, so she hired more chefs and later launched a meal-delivery service.
Brooks has supported her growing business with four PayPal loans, each one bigger than the last. With them, she bought a delivery van, started a direct-mail marketing campaign and attended a trade show.
Brooks has been able to borrow a larger amount every time because each PayPal loan is based on her PayPal sales. As they increase, the amount she can borrow increases, too.
“It doesn’t feel like a loan to me,” Brooks says. It feels like an investment, she says, except she maintains full ownership in her business.
PayPal Working Capital has provided $3 billion in funding to more than 115,000 small businesses since it launched in 2013. Along with Amazon Lending and Square Capital, it represents a new breed of small business lenders that taps directly into its existing customer base to provide fast business funding. Only PayPal customers are eligible for the company’s working capital financing.
Here’s what you need to know about PayPal’s loans and how they compare with other small-business financing options.
PayPal working capital loan at a glance
|Loan amount||Up to 25% of your yearly PayPal sales (maximum $97,000 for your first loan, $125,000 for future loans)|
|Borrowing costs||15% to 30% APR|
|Repayment||Automatic deduction of 10%, 15%, 20%, 25% or 30% of each PayPal sale|
|Funding time||Five minutes to apply, funding within minutes|
How a PayPal loan works
- At least $20,000 in PayPal sales in the past year with a PayPal Premier account, for casual sellers or non-businesses on PayPal, or $15,000 in PayPal sales if you have a Business account, for merchants who operate a business using PayPal
- A PayPal Premier or Business account for at least three months to be to eligible because PayPal uses these accounts to determine whether you qualify
You’ll know instantly if you’ve been approved or denied.
If you have an existing PayPal working capital loan, you’ll need to pay it off in full before applying for another round of financing.
Approximately 90% of businesses that pay off their first PayPal loan reapply for another round of funding, says Joseph Gallo, senior communications manager at PayPal.
Loan amount: You can borrow up to 25% of your annual PayPal sales, and the maximum amount of your first loan is $97,000. That goes up to $125,000 on all subsequent loans.
Borrowing costs: There’s no interest rate; PayPal charges a fixed fee based on your PayPal sales volume, your account history, the amount of your loan and the percentage of your sales you choose to direct toward repayment. That translates into an annual percentage rate between 15% and 30%, according to the company.
Repayment terms: PayPal will take a certain percentage of each PayPal sale until the loan is repaid. It will withhold the same percentage for each transaction, but you choose the amount: 10%, 15%, 20%, 25% or 30%. If you decide to pay back with a smaller percentage of your daily sales, PayPal charges you a higher fee; devoting a higher percentage of your daily sales to repayment results in a lower fee.
PayPal loan payment example: Let’s say you average $100,000 in annual PayPal sales and you are approved for a $25,000 loan to hire new employees for your business. The lower the repayment percentage you choose, the higher the fee, as the table below shows. So if you choose to have 10% of your daily sales go toward repayment, your fixed fee is $14,524, bringing your total repayment amount to $39,524, according to PayPal’s sample fee calculator. You’ll have lower ongoing payments, but the total cost of the loan will be higher.
|Repayment percentage||Fixed fee||Total repayment|
Choosing a repayment percentage depends on what you can handle. If you want more flexibility and can’t afford to withhold a larger portion of your sales, 10% or 15% repayment could make sense. But if you have strong sales, consider a higher payment percentage to save on fees and lower the APR on the loan.
There’s no specific time frame for repayment. On days when you don’t have PayPal sales, you don’t have to repay anything.
However, PayPal requires you to pay at least 10% of your total loan amount, including the fee, every 90 days to keep your loan in good standing. You can repay faster with no penalty. Some business owners pay in as little as 30 days, while others take several months, PayPal’s Gallo says.
Loan repayment typically is expected to occur within nine to 12 months from the date of the advance, according to PayPal’s annual report.
PayPal loans: Pros and cons
Fast funding: PayPal’s funding is fast because it already has your information and account history on file. Completing the application should take only five minutes or so, with funding transferred to your PayPal account in just a few minutes, according to the company.
Strong credit not required: Your personal or business credit scores aren’t a factor when applying for a PayPal loan, so you could qualify with bad credit. This is not the case with bank loans and other lenders, which typically require good to strong credit to qualify.
No collateral or personal guarantee required: PayPal doesn’t require collateral, which means you won’t have to pledge assets such as real estate or equipment that PayPal can sell if you fail to repay the loans. There’s no personal guarantee requirement either, so you won’t be held personally liable for unpaid loans.
You have to use PayPal: PayPal Working Capital is available only to businesses that already use PayPal to process payments. To repay the loan, you have to continue accepting payments through PayPal and not through other sources because repayments are deducted from your PayPal account.
No benefit to early repayment: You won’t save on fees if you make additional payments, since PayPal charges a fixed loan fee which is determined when you apply.
Low maximum loan amounts: You can borrow only up to 25% of your annual PayPal sales, to a maximum of $97,000 on the first loan. That means a borrower with $200,000 in annual PayPal sales will qualify for up to $50,000. It’s not the best choice for buying large equipment or real estate or for refinancing debt.
No boost to credit scores: A PayPal loan can’t help you build credit. Because PayPal doesn’t report to personal or business credit bureaus, paying the loans on time won’t raise your scores. However, it can improve your chances of getting another loan through PayPal and can lead to better terms.
PayPal loan vs. other small-business loans
PayPal Working Capital is just one of many small-business financing options available. Before you decide to get a PayPal loan, understand how it stacks up against other options in terms of total borrowing costs, repayment schedules and maximum borrowing amounts.
Traditional bank loans
PayPal’s loans are more expensive than traditional bank loans. Banks offer the lowest-cost small-business loans, with a typical APR of less than 10%.
To qualify for a traditional bank loan, you must have been in business
To qualify for a traditional bank loan, you must have been in business for at least two years, have good credit and be able provide collateral. If you can meet those requirements or if you need a larger amount of financing and can wait a bit longer for funding, consider applying for one.
Bank loans include Small Business Administration 7(a) loans, which are federally guaranteed term loans up to $5 million that carry low interest rates and long repayment terms. The terms depend on how you plan to use the money: seven years for working capital, 10 years for equipment purchases and up to 25 years for real estate purchases.
Additionally, business bank loans can boost your business credit score if you make payments on time, while a PayPal loan can’t help you build credit.
Merchant cash advances
Although PayPal Working Capital is a small-business loan, it resembles a merchant cash advance. Merchant cash advance companies take a daily percentage of businesses’ sales as repayment, similar to PayPal.
However, merchant cash advances are controversial largely because they’re associated with extremely high fees. APRs typically range from 40% to 350%, depending on the lender, size of the advance, extra fees and repayment length. PayPal loans have an APR range of 15% to 30%.
PayPal can charge lower fees than typical merchant cash advance companies because it lends only to existing customers; it doesn’t have to spend money marketing the loans, says David Goldin, founder, president and CEO of Capify, a small-business lender.
Online small-business loans
Online small-business loans vary widely, with APRs ranging from 6% to 99% and terms from 12 weeks to 10 years. PayPal’s APR falls between 15% and 30%. PayPal loans typically are repaid in less than a year, so if you want a longer repayment period, consider an online term loan instead.
In addition, you can borrow only up to 25% of your annual PayPal sales, topping out at $97,000 from PayPal on the first loan, whereas some online lenders offer $500,000 or more.
Finally, although a PayPal loan doesn’t help boost business credit, some online small-business loans can build credit.
Find and compare small-business loans
NerdWallet has created a comparison tool of the best small-business loans to meet your needs and goals. We gauged factors including lender trustworthiness, market scope and user experience, and arranged them by categories that include your revenue and how long you’ve been in business.