Small-Merchant Funding Gallops Along as PayPal Hits $500 Million Mark, CAN Capital $5 Billion

Seemingly shunned by traditional lenders during the Great Recession a few years ago, small merchants turned to alternative financing to buy inventory and equipment. It’s a trend that shows few signs of dissipating.

PayPal Inc. this week said it had lent $500 million in the first 18 months of its Working Capital program, and CAN Capital Inc., New York City, says it has surpassed the $5 billion mark since its founding in 1998. Square Inc. also offers Square Capital, which launched in May 2014. It surpassed $100 million in funding in February to more than 20,000 businesses, a Square spokesperson says. In December the figure was $75 million.

The competition is intensifying among these alternative-financing services. San Jose, Calif.-based PayPal increased its maximum loan amount to $85,000 or up to 15% of a merchant’s annual PayPal processing volume, whichever is less, says Darrell Esch, PayPal vice president and general manager of its small and mid-size business lending. The cap had been 8%.

Unlike some services, PayPal Working Capital is a loan, repaid by a daily percentage of charge volume that is fixed until payoff.

More than 40,000 merchants have used PayPal Working Capital since its launch, with more than half of them using the funds to buy inventory. Others may spend the funds on expansion, seasonal hiring, Web-site development, and marketing, Esch tells Digital Transactions News.

At CAN Capital more than 156,000 small businesses have used its cash-advance services. Unlike a loan, cash advances are purchases of future credit card receivables. CAN Capital also offers business loans.

In April, CAN Capital lined up a $650 million line of credit from a dozen lenders, including Wells Fargo & Co. and JPMorgan Chase & Co.

Others, like RapidAdvance, a Bethesda, Md.-based alternative-finance company, continue to promote their services. The company recently launched a referral program to offer financing to members of the National Small Business Association.

Alternative-financing companies are fulfilling a vital need among small-business owners, Todd Ablowitz, president of advisory firm Double Diamond Group, Centennial, Colo., tells Digital Transactions News. “Small businesses don’t have access to capital the way they used to from the traditional banking system, nor the way larger businesses have,” Ablowitz says. Alternative financing is in high demand, he adds.

In addition to aiding merchants by easing periodic cash-flow issues, the service also boosts providers by enhancing merchant retention. PayPal says approximately 90% of its Working Capital clients reapply for another loan. “It’s an improvement in retention,” Ablowitz says.

Merchant acquirers and independent sales organizations reselling alternative-financing services also can benefit. “If they can be of more utility to their customers, they are going to be more valuable,” Ablowitz says.