With the Small Business Administration (SBA) single-handedly approving over 50,000 loans worth just over $19 billion in fiscal year 2014, it’s clear that small business owners are hungry for outside financing.
And more alternative lenders have emerged in the last few years to meet this growing demand. Among the many companies challenging traditional lenders like banks and credit unions, digital payment providers PayPal and Square are quickly carving out their own space in the field of small business lending.
Though still relatively new players in the game, both companies have gotten off to a hot start: Square Capital and Paypal’s Working Capital program have provided around $275 million to 40,000 merchants over the past year, according to a report by Bloomberg.
Here’s a closer look at the practices of these two popular digital payment providers as well as why more entrepreneurs are heading their way.
PayPal’s Working Capital
From crowdfunding to peer-to-peer lending, there’s no shortage of options when it comes to alternative business financing. By implementing a repayment system very different from those of many other lenders, PayPal’s Working Capital program, which has been around since September 2013, has taken a big step toward separating itself from the pack.
Although small business owners can apply for up to $60,000 in loans, the typical amount is about 8% of an enterprise’s PayPal sales over the past 12 months. As you might have guessed, these loans are available to “select businesses that already process payments through PayPal,” according to the company’s website.
Instead of asking for monthly payments from borrowers, PayPal deducts a fixed, predetermined percentage of a business’s daily sales from its PayPal account. This typically ranges from 10% to 30% of daily sales. PayPal also charges a one-time lending fee. The higher your daily deduction, the lower the premium. Small business owners also can pay back their loans early – in full and at any time – without being charged a fee.
PayPal’s program helps entrepreneurs avoid potential issues like late payment penalties and fluctuating interest rates. Applying for a Working Capital loan can take as little as five minutes, and funds are automatically transferred to a business’s PayPal account within minutes of a loan’s approval.
Like PayPal’s Working Capital program, Square Capital more closely resembles merchant cash advances than traditional loans. Businesses receive a loan from Square before making automatic payments set up as fixed percentages of their daily card sales. The lower the total amount of the loan, the lower the fixed daily rate. Square also charges a single fee of around 10% to 14% of a loan’s total value.
Similar to PayPal’s system, small business owners have as long as they want to pay back borrowed funds. Another part of Square Capital’s appeal is that small business owners automatically repay more of their loans when sales are booming and less when they aren’t.
Though Square started funding small businesses in May 2013, it already has its sight set on expansion. In August, Square obtained a loan of its own from Victory Park Capital, a Chicago-based investment firm. Although the terms of the deal weren’t disclosed, the move signals growing confidence in the ability of digital payment providers to double as small business financers.
Securing funds for your small business through PayPal or Square comes with some undeniable perks. Because small business owners aren’t subjected to credit checks and don’t have to submit mountains of paperwork, the application process is painless. Making good on loans is similarly straightforward.
As your small business continues to evolve, so too does the world of small business financing. With so many options at your disposal, it’ll be worth keeping an eye on PayPal’s Working Capital program and Square Capital.
Business loan illustration via Shutterstock.