Inside PayPal's Microlending Program

As the owner of Crisloid, a maker of high-end backgammon, checkers and cribbage sets, Jeff Caruso knows that if he buys more raw materials in late summer, he can make more money during the holidays. The problem is coming up with the extra cash. That’s why he borrows from PayPal, which began issuing single, fixed-fee loans of $1,000 to $20,000 to qualifying customers in 2013 through its Working Capital program. (The cap was raised last year to $60,000.)

Caruso has taken three business loans through PayPal’s microlending program, borrowing $10,000 to $15,000 a pop—$35,000 in all. He uses the money to meet his Providence, R.I.-based company’s fourth-quarter spike in demand, which helped revenue exceed $500,000 last year for the first time.

“Come August, if I can take $12,000 and turn that into finished goods, it’s all going to sell,” Caruso says. “It helps us finish the year that much stronger.”

Since launching the Working Capital program, PayPal has paid out more than $200 million, granting some 35,000 loans to 20,000 U.S. small businesses. Last fall, PayPal expanded the program to the U.K. and Australia.

More than half the borrowers use PayPal loans to buy inventory, says Darrell Esch, the company’s vice president of SMB lending. Other popular uses for the money include temporary hires, warehouse expansion and website overhauls. “It really helps merchants grow,” he says.

How it works

PayPal lends approved borrowers up to 8 percent of their annual sales made through the platform, the equivalent of one month’s processing volume, according to Esch. There’s no due date on the loan; instead, PayPal automatically draws payments from a borrower’s account after a sale is made, until the loan is repaid. (Borrowers get a reprieve on days with no sales.)

Borrowers can elect to designate from 10 to 30 percent of their daily sales as repayment; Caruso, for example, chose to repay 15 percent of daily sales and has paid off each of his loans in three to five months. Borrowers can make extra payments or pay a loan off any time at no additional charge.

“Once the loan is paid in full, you can come back and apply again,” Esch says, noting that about 80 percent of people who close loans take out another one.

What it costs

PayPal loans run from 2 to 11 APR of the money borrowed. The higher the percentage of each day’s sales that goes to repayment, the lower the loan cost. If PayPal tries to retrieve a payment after a sale but the account balance is insufficient (presumably because you moved the money elsewhere), the platform will withdraw the necessary funds the next day, Esch says. There’s no charge for these “catch-up” payments.

How to qualify

Loan applicants must have at least $20,000 in sales through PayPal during the previous 12 months and at least 90 days of processing history on the platform. “It doesn’t take long to build it up,” Caruso says. (Esch points out that PayPal doesn’t prohibit borrowers from using other transaction platforms.) PayPal also checks applicants’ identity and credit history.

Just be sure you don’t get in over your head. Caruso suggests initially borrowing less than you’re approved for and repaying at a lower percentage. “Start small,” he advises. “Make sure you know your margins. Plan what you can handle for a repayment so you don’t choke yourself.”