In early September, online payment processor PayPal announced its intent to purchase online loan company Swift Capital, subject to regulatory approval. This move likely signals PayPal’s intention to continue to press competition on competitors like Square and Kabbage.
While lending has loosened up again somewhat for small and medium-sized businesses with traditional lenders, online lending has created a new option for credit that is unlikely to disappear.
What will this new acquisition mean for small businesses?
Faster credit.
Applying for credit from a bank generally, takes a substantial amount of time. Businesses need to show a wide variety of documentation to demonstrate their ability to repay a loan.
PayPal’s working capital program works much more quickly; since borrowing is currently determined by the level of payments that a business currently has coming into the PayPal system, determination goes much more quickly. Merchants report that they often receive approval within a day or two.
When a business needs funds immediately to pursue an opportunity or meet a business need, having that rapid turnaround can be the difference between the money helping and being useless.
Higher loan amounts.
Right now, PayPal offers loans to Premiere and Business customers based on the amount of money they process through the PayPal system. The financial company offers short-term loans of up to $125,000. Swift
Financial, meanwhile, processes loans of up to $500,000. With the acquisition, experts believe that PayPal will be able to expand the funds that it offers up to that $500,000 cap, while potentially opening its working capital system to those who are not part of its payments service.
Avoid more expensive lending options.
Instead of the traditional interest systems, working capital loans through Paypal often use a flat fee system. While the fee still generally works out to be the same amount as a 25 percent APR, knowing up front what they will repay can help businesses plan and manage their payments well.
This fee also makes the working capital program one of the more affordable fast lending programs available to small businesses.
This is also important when you consider just how expensive other lending options can be. Invoice factoring, for example, involves selling off company assets (old, unpaid invoices) at a substantial discount.
Many other alternative lenders charge significantly higher interest, sometimes as high as 99%. For businesses that may already be struggling, these sorts of interest rates can make obtaining capital quickly impossible.
While it has not yet been made clear how lending fees might work for business customers who are not PayPal service users, or at the higher lending possibilities that may be available through the acquisition, the hope of experts is that the lower rates will continue to be available.
Additional funding opportunities for “risky” borrowers.
Small businesses are often considered risky borrowers to traditional lenders. They don’t always have a long history of successful profits, especially when they’re looking for expansion capital or seed funding.
They aren’t often looking for the kinds of funds that make big banks feel like underwriting a loan is a worthwhile investment. They may not have good enough credit or assets for a bank to be willing to take a risk.
These issues are compounded when the business owner requesting the loan is a person of color, a woman, or both.
Many business owners absolutely have the ability to pay back the small, short term loans they need to get their business through a rough patch or to make an expansion when they see an opportunity. Alternative lenders have stepped into this space to help small businesses continue to grow the economy.
Increasing PayPal’s ability to lend is likely to continue to grow that space. Specifically, investors expect to see PayPal open a working capital or business loan program to those who do not currently use their service to accept payments, a function they previously have been unable to fulfill.
Reach more businesses.
PayPal’s working capital program is currently limited to those Premiere and Business customers who process a certain amount of money through the system. The maximum amount that can be borrowed is also determined by that processing amount. In general, they can borrow 25% of what they process through PayPal.
Swift Capital, obviously, determines loan amount differently, as Swift only underwrote loans, but never processed payments. Between being able to offer loans and working capital to business other than those which work with PayPal as a payment processor, and having a potential for higher loan amounts, the new acquisition should allow PayPal to offer loans to a much wider range of companies.
After the financial crisis in 2008, it is true that alternative lenders filled a crucial gap in the world of small and medium-sized business lending. Unfortunately, many of those alternative lenders have bordered on predatory, especially those which offer to help companies acquire capital quickly.
Both PayPal and Swift Financial have reputations for high quality, above board lending that helps companies continue to operate and expand.
Small businesses are often described as the backbone of the American economy. They employ a huge portion of the workforce, generate a great deal of capital, and offer services that larger corporations simply are not interested in providing.
Small businesses often work with niche customers, small communities, and offer such specific solutions that they are not only uninterested in appealing to a huge audience, but their business model would not support doing so.
Because of their size, small businesses often have the flexibility to pivot quickly when there are sudden changes or disruptions in the market; larger corporations are much more unwieldy and must adapt on a slower, more institutional level.
But small businesses are also more vulnerable to sudden changes; working capital loans can often give them the buffers that they need to survive changes and disruptions in their industries until they can right themselves.
Experts hope that the acquisition between PayPal and Swift Financial will create a larger, more reputable lender for small businesses that need rapid access to capital than either company was able to provide before.