Thursday, April 05, 2018

Lessons from PayPal's Working Capital Program

PayPal has a program called "Working Capital" that basically gives you a loan directly to your PayPal account based on your annual PayPal activity.

This is unique for a couple of reasons:

1) It does not affect your credit score since PayPal looks at your past history. They already know what your cash flow is and what you can afford.

2) Payments are automatically deducted from your regular sales. So you never have to actually make a payment. But every time you make a sale or receive money via PayPal, they take their payment.

I happen to do my credit card processing through PayPal, so I've got a steady cash flow going through their system already. I find their approach very appealing. Too many small businesses fall into the trap of taking whatever credit they're offered - at any price. Unfortunately, that often means credit cards with interest rates of 25-35%.

I'm not a fan of going into debt, but I decided to try the Working Capital program to see how it "really" worked and how painful it was. Here's my report.

The interest rate for me was 5.55% - which is excellent. In my opinion, credit card rates are absurdly high. At 20% and above, it is nearly impossible for people to pay them off. And, no matter how good you are with payments, there's also at least one time during the year where you end up paying that interest. If you let it slide, of course, then it compounds.

They don't call it an interest rate here, but an up-front "Loan Fee." The best part about it is that there is no compound interest. You pay your six percent (or whatever) up front. It's rolled into the load and that's it. Bottom line: No matter how slow you pay, you will never pay more more than this initial fee.

Note: The loan fee varies, depending on how much you pay back from each future sale. If you dedicate a larger percentage from each sale, you'll get a lower rate. Also, the size of the loan affects the fee.

I love that payments are automatic. You can choose the payback rate. So, if you commit to a 20% payback rate, your loan will take longer to pay back than if you commit to 30%, and you will pay a slightly higher loan origination fee.

Two things I have to say about the payback. First, you can't change it. Take this into consideration. You might think you'll just stick that money in the bank so you can use it little by little as needed. But if you spend all the money from the loan, the payback can seriously affect your cash flow.

Second, a quicker payback might be painful. I have plenty of money flowing through my account, but I can tell you that it was painful to see a $100 sale result in only $70 hitting my bank account. Payments are taken after PayPal's regular fees. Mine's about 2.9% for credit cards. So a $1,500 sales drop about $1,005 into my account. Ouch.

Do your own calculations here. Imagine you take a loan for $10,000 to buy equipment so you can make more sales. Cool. Now calculate how long it will take you to pay back about $11,000 by automatically paying 30% of all PayPal sales until the loan is paid. This could easily be several months with an effective 30% reduction in cash flow.

As I mentioned, I like this program and payback schedule. In large part, that's because the payback process is very straight forward - even if it's painful. Giving up 20-30% of your cash flow while only paying 5-6% fees keeps you in touch with your money and doesn't cost much.

To me that's way better than putting $10,000 on a credit card, making payments and paying 25-35% in interest, compounded month after month. The credit card might be better for your personal cash flow, but it's VERY expensive in the long run.

You have to pay back a certain percent every three months. So if your PayPal sales traffic doesn't automatically reach that payback amount, you will need to make additional payments. But note that there are no late fees or penalties. Of course I highly recommend that you only do this if you have a PayPal account with a high volume of sales.

Bottom Line: I loved this loan program. I would do it again. I probably will do it again. It's a very honest, straight forward, and simple way to get some working capital. About a thousand times better than using your credit cards to fund your business.

That's my two cents.

Check out PayPal Capital's FAQ Here:


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