PayPal ties loan repayments to cashflow

Up to 55,000 of Australia's small businesses may qualify for PayPal loans of up to A$20,000 when the payments facilitator's credit program launches later this year.

PayPal will begin testing the initiative in Australia this week and plans to offer a select group of businesses loans of up to eight per cent of their annual revenues - to a ceiling of $20,000.  

It's part of the payment company's bid to "grow or fuel their business and result in greater volumes on the PayPal network," according to Kareem Al-Bassam, PayPal's director of customer experience and delivery.

Driving volume makes sense as PayPal charges organisations 1.1 per cent to 2.4 per cent plus 30 cents per transaction for payments made using its network.

Repayment of the PayPal Working Capital loans will involve an upfront fee, and then a repayment of between ten per cent and 30 per cent of all transactions conducted over PayPal until the loan is paid off, which Al-Bassam said ties loan repayments to cashflow.

For an $8000 loan companies have a range of repayment options - the most expensive would see them pay $949 upfront and then ten per cent of each transaction until the loan was repaid, resulting in a total charge of $8,949.

The cheapest option would involve a $294 upfront fee and 30 per cent of each transaction, costing $8,294 in total.

Because the repayments model has been structured without interest payments as such, the loans could comply with Islamic financing requirements, although Al-Bassam said that this was not a specific target for the company.

PayPal will mine its transaction database to identify and prequalify companies which it believes could benefit from loans in order to drive sales, and which also have a business profile matching PayPal's appetite for risk. The terms of its Purchased Payment Facility ADI licence allow PayPal to offer this sort of facility, according to Al-Bassam.

In the US about 20,000 companies have already been provided with PayPal loans totalling around US$150 million.
 
Al-Bassam said that, while the Australian regulations governing how loans may be offered to businesses were not a "free for all," they were more relaxed than the ASIC regulations governing consumer credit offers.

Although PayPal does offer consumer loans in the US (and plans to expand that to the UK and Germany), Al-Bassam said that there were no plans to offer consumer loans locally.

At present PayPal's parent organisation eBay is providing the deep pockets to fund the loan program, according to Al-Bassam, who said the online sales business had around US$12 billion of cash at its disposal.

However, eBay has signalled recently its intent to cut PayPal loose. Al-Bassam said that PayPal should still have the cash reserves to fund the loans program even after that separation.

"We believe we will be able to fund this. As in any divorce there is a split of assets and US$12 billion cash is an interesting asset," he said.

Al-Bassam said that PayPal had not approached the Australian banks about co-funding its Working Capital loans initiative, "but we hope in Australia we can get to a position where we are in a closer relationship with the banks."

"After all, we handle three per cent of payments in Australia. We may look at co-funding with the banks if we are constrained with capital." he said.

In future, PayPal may also collaborate with the banks to offer larger loans. Al-Bassam acknowledged that "we don't have any pedigree in small and medium business loans in the $200,000 to $500,000 bracket."

He said that, although PayPal had had some discussions with local banks, "we are not in a dialogue about co-funding."