Both PayPal and Square have expanded into the online small business lending space by offering working capital loans to small businesses that use their payment processing services. These loans function similarly to merchant cash advances as borrowers commit a fixed percentage of daily credit card sales to repay the loan. However, unlike merchant cash advances, these products are traditional loans and not the sale of future credit card receivables.
What Are the Advantages?
One of the main advantages of getting a loan through your payment processor is the speed of funding and convenience of repayment.
Speed
Both PayPal and Square can provide funding to merchants within one business day. For PayPal, business owners receive funds to their PayPal accounts within minutes. Square deposits funds to a business’s bank account, which provides a little more flexibility for using the funds, but takes up to one business day to post.
Repayment Schedule
Because the business pays back the loan through a fixed percentage of daily sales, this means that the actual dollar amount repaid is based on gross sales. So slow sales days translate to lower payments and high sales days translate to larger payments. Moreover, payments are taken out automatically, so business owners don’t have to worry about missing a payment.
Neither a PayPal Working Capital loan or Square Capital loan requires repayment on days that a business has no credit card sales, meaning there’s less impact on a business’s daily cash flow. However, both lenders require borrowers to make minimum payments every 60 to 90 days. This is different from a standard merchant cash advance that may require minimum daily payment regardless of sales volume.
Longer Maturities than Merchant Cash Advances
If you take out a loan through PayPal or Square, you have up to 18 months to pay it back. Many merchant advance cash offer shorter maturities under one year or nine months, which can put undue stress on your business’s cash flow and working capital.
Drawbacks to These Loans
While these loans from PayPal and Square can be good for businesses in need, they do have a few notable drawbacks: high APRs and low loan amounts.
Payback Time Can Lead to High APRs
The less time it takes you to pay back the loan the higher the annual percentage rate (APR) will be. According to an article from Re/code, if a business takes out a $7,300 loan from Square with fees totaling $1,022, the APR can be very high if the business pays off the loan quickly. If the business repays the loan over one year, the APR will be 14 percent. The APR will be 28 percent if the business repays within six months. However, if the business pays off the loan in a month, the APR will be 165 percent.
APRs at PayPal—while higher than average—are less than at Square. They range from 15 percent to 30 percent based on the fixed percentage of daily sales you choose as repayment.
Low Loan Amounts
PayPal only allows businesses to borrow up to 18 percent of annual PayPal sales, up to a maximum of $97,000. On the other hand, Square only offers up to $10,000 to eligible businesses (and businesses must be invited to apply). For low amounts, it may be worthwhile to invest in a line of credit or a small business credit card instead. You can still get quick access to capital, but also pay less in fees and interest. If you need more than what either PayPal or Square can offer, you should consider getting a traditional business loan.
[Editor's Note: Visit our sister site, Business News Daily, for a list of the best alternative small business loans here.]
What Are Small Business Owners Saying?
Reviews from small business owners about PayPal Working Capital and Square Capital were mixed. Some business owners, like John Olson of Graystone Industries, had positive experiences: “This last PayPal Working Capital loan has allowed us to bring in new inventory, hire another customer sales rep and make discounted bulk purchases from several of our vendors. In this time frame we have utilized these benefits to increase sales by 52 percent in what is typically the worst quarter of the year. The repayment is also fast and easy with payments coming out of daily sales.”
For Karen Moran of Sweet Lulu’s Bakery on Wheels, a Square Capital loan helped her expand her business: “I was offered two rounds of Square Capital and loved it. First round, I needed help as a huge catering job came in and I wouldn’t be paid until a month after. Second round, I bought my second camper.”
Other business owners had less positive experiences with these loans. Terri Jay, a medium and pet psychic, didn’t like the high fees associated with the loans: “I have used PayPal Working Capital twice. I will never do it again. In both cases, I needed money fast for my business for travel, marketing and website revamp and didn't realize how high the fees were…. To borrow $5,000, it will cost you over $800 in fees. I think I would have been better off getting a business credit card and that is what I would do if I needed funds in the future.”
Nick Braun, founder of PetInsuranceQuotes.com, echoed Jay’s sentiments: “We have a PayPal Working Capital line but haven't used it in over a year. The credit line is too small to really make an impact so we've just kept it in case of emergencies. I don't think lenders should waste their time unless they can offer a meaningful amount of credit ($50,000+). Otherwise it's basically a cheap credit card with no balance, but no rewards or security services.”
Consider a Small Business Credit Card Instead
Small business credit cards can offer credit limits similar to what PayPal and Square can offer, and they have the added benefit of rewards and no interest if you pay in full. Even if you don’t pay your balance in full, average APRs on small business credit cards are 15 percent, which is better than some of the high APRs offered by PayPal and Square. If you make frequent business purchases, a small business credit card is likely a better alternative to one of these loans. Chase, American Express and Capital One all offer great business credit cards with low annual fees and high signup bonuses.
Photo credit: isak55/Shutterstock
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