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As small online merchants prepare for holiday-season sales, they’re seeking out financing to support extra help and added order fulfillment, and that’s boosting new financing options from online processors.
PayPal Inc., for example, now has 20,000 mostly e-commerce businesses using its 15-month-old PayPal Working Capital merchant cash-advance service. It has extended $200 million to these merchants, for an average of $20,000 per business. And now, with the holiday shopping season in full roar, it’s seeing a lot more interest. So much so, in fact, that the rate of financing has now hit $1 million daily, Chris Morse, head of merchant communications at PayPal, tells Digital Transactions News.
“Some are borrowing for the holiday season for inventory and to help with logistics,” says Morse. “It’s additional help because you just need to focus on getting product out.”
In a manner similar to the way it works with conventional merchant cash advances against credit card receipts, merchants repay PayPal out of proceeds they take in in their PayPal accounts. The maximum advance, once $20,000, went up to $60,000 this summer, Morse says. Merchants can choose from five repayment percentages between 10% and 30%. The lower the percentage, the higher PayPal’s fixed fee, which must be repaid on top of the original amount. These fees range from $294 at the 30% repayment rate up to $949 at 10%, according to an example on PayPal’s Web site.
To fund Working Capital, PayPal uses WebBank, a Salt Lake City-based financial institution serving niche-financing needs.
Merchants may benefit from these capital injections, especially as they tend to be faster and require less paperwork than conventional bank loans. But PayPal sees them seeding more volume for its network as merchants expand and sell more. “The more [transactions] we can run through our infrastructure, the better,” Morse says.
An added advantage for processors like PayPal and Square Inc., which launched a rival service this spring called Square Capital, is that they are sitting on reams of data on how a business is performing, since they handle the merchant’s payments. That helps smooth out underwriting when demand follows seasons like holiday shopping. “In some instances, we have 10 or 12 years of history with these merchants. That’s incredibly valuable to us. We see what we’re getting into,” says Morse.
And it’s not just the Christmas season that spikes demand. Merchants tend to line up for more capital at various times. Indeed, of the 20,000 merchants served by Working Capital, some 11,000 are repeat clients. “It caught us by surprise that there was so much seasonality,” Morse notes. “Certain merchants are looking for capital at certain times of the year.”
Demand for Working Capital is now such that Morse says PayPal is mulling a number of moves to expand its availability to more PayPal merchants. Currently, as with Square Capital, the service is available on an invitation-only basis. “We want to get it out of the invitation phase and open it up to more folks,” he says. Plus, he adds, “loan sizes will get bigger.”
Meanwhile, eBay Inc.’s decision to spin off PayPal as an independent company, a move planned for the second half of next year, will not affect plans for Working Capital, Morse says.
With new entrants like PayPal and Square, the merchant cash advance (MCA)business is growing at a 15%-to-20% rate, and will likely exceed $6 billion in total next year, up from about $5.25 billion in 2014, figures Barry Davis, who follows the business as a senior management consultant at The Strawhecker Group, an Omaha, Neb.-based payments consultancy.
As for PayPal, it’s not yet among the top 10 providers, a list dominated by independent sales organizations as well as MCA specialists that have been in the business for years. But it is “probably going to get there in a hurry,” says Davis.
