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PayPal Loan Are More Expensive Than Traditional Bank Loan

05.04.2016 14:06:35

PayPal has advanced about $1 billion to small-business owners since it launched its PayPal Working Capital loan product in September 2013.

You’re eligible for a PayPal loan if you use the service to accept credit cards and have had at least $20,000 in PayPal sales in the past year. If you don’t use PayPal, you’re not eligible for a PayPal loan, but there are other online working capital loans for which you may qualify.

Here’s what you need to know about PayPal Working Capital and how it compares with other small- business financing options.

Would You Borrow From PayPal?

With PayPal Working Capital, you can borrow up to 15% of your yearly PayPal sales up to $85,000. PayPal’s underwriting is completely based on your sales — the company doesn’t even check your credit score.

For repayment, PayPal will keep a certain percentage of your daily PayPal sales. It will withhold the same percentage each day, but you can choose the amount — 10%, 15%, 20%, 25% or 30%.

There’s no interest rate; you pay a flat fee based on your PayPal sales volume and the percentage of your sales you choose to go toward repayment. If you decide to pay back with a smaller percentage of your daily sales, PayPal charges you a higher fee; devoting a higher percentage of your daily sales to repayment results in a lower fee. When you translate this into an annual percentage rate, the APR for PayPal loans ranges from 15% to 30%, a company spokesman said in an email.

Example loan PayPal

For example, say you average $100,000 in annual PayPal sales and you want an $8,000 loan. If you choose to have 10% of your daily sales go toward repayment, your loan fee is $949, bringing your total balance to $8,949. If you choose 20%, your fee is $445 ($8,445); if you choose 30%, your fee is $294 ($8,294), according to the PayPal Working Capital website.

There’s no specific time frame for repayment; PayPal withholds the set percentage from your daily sales until you repay the loan and fee. On days when you don’t have PayPal sales, you don’t have to repay anything. Regardless of your sales, however, PayPal requires you to pay at least 10% of your total loan amount (including the fee) every 90 days. You can repay faster with no penalty — some business owners pay in as little as 30 days, while others take several months, the PayPal spokesman said.

PayPal Working Capital is just one of many small-business loans out there. Before you decide to get a PayPal loan, understand how it stacks up against other options in terms of total borrowing costs, repayment schedules and maximum borrowing amounts.

Traditional bank loans

PayPal’s loans are more expensive than traditional bank loans. With a typical APR of less than 10%, banks offer the lowest-cost small-business loans. If you qualify for a traditional bank loan (you’ve been in business for at least two years, and have good credit and collateral), you should apply for one. Additionally, business bank loans can boost your business credit score if you make payments on time. A PayPal loan can’t help you build credit because PayPal doesn’t report to business credit bureaus.

Merchant cash advances

Although PayPal Working Capital is a small-business loan, it resembles a merchant cash advance. Like PayPal, merchant cash advance companies take a daily percentage of businesses’ sales as repayment. Merchant cash advances are controversial largely because they’re associated with extremely high fees — APRs range from 60% to 200%, according to a 2014 white paper by the National Community Reinvestment Coalition.

But PayPal can charge lower fees than typical merchant cash advance companies because it lends only to existing customers; it doesn’t have to spend money marketing the loan, says David Goldin, president of merchant cash advance company Capify and co-founder of the Small Business Finance Association, a merchant cash advance trade group.

Online small-business loans

Online small- business loans vary widely, with APRs ranging from 7% to 113% and terms from six months to 10 years. PayPal’s APR falls at the lower end of that spectrum, so its loans are relatively affordable. But PayPal loans are typically repaid within months, so if you want to pay off a loan over several years, consider an online term loan instead. In addition, you can borrow only up to $85,000 from PayPal, whereas many online small-business loans will fund as much as $500,000. Finally, although a PayPal loan doesn’t help boost business credit, some online small- business loans can build credit.


Tags: [PayPal]

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