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A New Kind of Lender: Borrowing From PayPal and Square

By Riena Lisonsky for Fundera Ledger,

When you’re a small business owner seeking capital, being able to get financing from a source you know and trust is a big plus. Two popular payment-processing services that many small business owners rely on now offer small business loans, too. Here’s a closer look at business loans from PayPal Working Capital and Square Capital.

PayPal Working Capital

PayPal merchants who’ve been using PayPal for at least 3 months and processed at least $20,000 in sales are eligible to apply for PayPal Working Capital. Just provide basic information, including your name, Social Security number, business tax ID number, time in business and the purpose of the loan—the process takes just minutes. Once you apply, PayPal instantly calculates the amount you’re eligible for—and if you’re approved, they deposit the proceeds in your PayPal account right away.

You repay loans daily, based on a percentage of your PayPal sales that you select ranging from 10% to 30%. The higher the daily repayment percentage you choose, the lower your loan fee will be. PayPal charges one fixed loan fee, determined by a combination of your loan amount, PayPal sales history, and repayment percentage chosen.

PayPal Working Capital offers loans from $1,000 up to 18% of the sales your company has processed through PayPal in the past 12 months, to a maximum of $97,000. You pay less on days when sales are low and more on days when sales are high, and once the loan is paid back, you can apply for a new one.

Since a lot of merchants use PayPal as a secondary payment method, PayPal is alert to any irregularities that might signal you’re not planning to pay the loan back. You must pledge to use PayPal to process payments for the duration of the loan. They’ll keep a careful eye on your PayPal balance to make sure it doesn’t get too low. They also require a minimum payment of 10% of your total loan amount every 90 days, as a way of keeping tabs on your repayment.

Square Capital

Square Capital buys part of your future receivables and gives you a lump sum in return. In order to qualify for Square Capital, you need to be a Square merchant—they determine your eligibility from your Square history and payment processing volume. Go into your Square Dashboard and, if you’re eligible, you’ll see the Square Capital page with a link to “View Your Options.” Essentially, you’re getting invited to apply based on information the company already has about your sales history, making the application process quick and easy.

If you’re approved, those funds can get deposited into your business bank account as early as the next day. The cost of capital is based on your total card sales, and repayments are made automatically as a fixed percentage of your daily payment card sales. As with PayPal’s, this repayment method offers great flexibility: On days when your sales are lower, you pay less, and on days when your sales are higher, you pay more.

Working capital between $2,000 and $50,000 is available, although the average amount borrowed is $10,000. Once the loan gets paid back, you can apply for a new one.

For both lenders, you can make extra payments or pay off the loan early without any penalty. However, there’s no real benefit to doing so, since no interest is charged on either loan.

What’s the Difference?

There’s not a lot of difference between Square Capital and PayPal Working Capital, but PayPal does have an advantage in some areas:

  •   Although neither company provides loan cost information in APR format, reviewers have calculated Square Capital’s average APR as 35% while PayPal Working Capital’s APR average from 15% to 30%.
  •   PayPal lets you choose your own repayment percentage.
  •   PayPal offers larger loans. However, since loans are based on a percentage of PayPal sales, you’d have to have been using PayPal at least a year and have significant PayPal sales to qualify for these higher amounts.

In most situations, the best lender for your business will come down to which payment processing service you already use. Whichever lender you apply to, make sure to calculate your APR before taking the loan, and make sure you’re comfortable with daily repayments.

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