The initiative, called the Working Capital pilot program, offered 90,000 of PayPal’s U.S. merchants the opportunity to borrow against their annual PayPal revenue (up to 8% or a maximum of $20,000). The program was initially set for three months, but PayPal will be extending the initiative en route to a global roll out in 2015.
The move into small business lending puts PayPal in direct competition with Kabbage (also a Finovate alum). According to PayPal, more than 4,000 loans have been processed through the program.
PayPal charges a flat fee for the loans, collecting neither interest nor additional fees (including late fees). In return, PayPal gets paid by deducting 10-30% from the merchant’s daily receipts. The flat fee and the percentage deduction are inversely related, meaning a higher flat fee will produce a lower daily percentage deduction.
PayPal will not deduct from merchants that do not record a sale on a given day. The company says that in addition to not issuing late fees, it will not impose repayment deadlines or conduct credit checks on its small business borrowers.
Founded in 1998, PayPal became a wholly owned subsidiary of eBay in 2002. The company has revenues of more than $5 billion annually and appeared on the Finovate stage as part of FinovateEurope 2012.