*This article was updated on September 26, 2013 at 6:50 p.m. MST to include the cost of the example PayPal fee amounts, which were expressed in the article as a simple interest calculation, in order to ‘also include the calculation as annual interest, now included at the end. of this room. *

As tight bank credit and rising interest rates continue to stifle traditional alternatives for small business lending, a new PayPal offering has entered the mix.

Called PayPal Working Capital, the new program offers the company’s 90,000 merchants the ability to borrow up to 8% of their annual PayPal volume up to a maximum of $ 20,000. PayPal charges a flat fee that is refunded automatically as a 10-30% deduction from incoming receipts until the balance is paid. The higher the reimbursement percentage, the lower the fees. Merchants can apply for a new loan as often as needed, with the balance of the previous loan being paid off.

Why would PayPal do this? At first glance, the program makes sense for PayPal: The company is well secured because it only grants credit to existing customers who already demonstrate healthy cash flow. The program is easy to understand and easy to implement. The cost to the entrepreneur is presented in the form of a unique number, with no additional setup costs and no prepayment charges. Since reimbursement is an automatic deduction, the business owner has no reimbursement process to manage, eliminating the risk of late or forgotten payments or fees.

In the example published by the company, the fees are as low as $ 281 for a loan of $ 8,000 (3.25%) with repayment of 30% of revenue or as high as $ 947 (11.83%) with 10% refund. PayPal is of course amply covered, as the company already controls incoming merchant receipts, a factor that also gives PayPal inherent access to online sales history for its merchants as the revenue flows through their transaction vaults.

Armed with this intelligence, PayPal can make a decision and approve a loan in minutes, without a credit check.

For now, the program is exclusive to the 90,000 existing merchants invited by phone, email, direct mail or online account notification, and loan amounts are small, not to exceed $ 20,000 (which would equate to 8 % of PayPal’s annual revenue of $ 250,000 per year).

The offer expires at the end of the year, but PayPal plans to launch a larger version of the program in 2014, said representing Darrell Esch (a former director of Bank of America), after the company evaluated the results of the initial program. Since PayPal cannot legally provide loans to its merchants directly, the program is administered by Salt Lake, Utah-based WebBank, which also partners with PayPal’s BillMeLater.

That’s good news, isn’t it?

As loans to entrepreneurs have fallen dramatically since the Great Recession, this new program can help close the seemingly insurmountable gap. (The current stock of small business loans was only 78% of 2007 levels in the fourth quarter of 2012, according to Federal Reserve data.)

Lack of financing for small businesses is actually hampering economic recovery, according to political analyst Ann Marie Wiersch.

The move also places PayPal directly on the sites of traditional banks, says Nick Holland, senior analyst at Javelin Research. In one interview with American Banker “He warned:” Financial institutions should be afraid. PayPal has the audacity of a startup with an R&D budget greater than the incumbent operators.

But unlike a bank, PayPal has direct, intimate access to the company’s lifeline – financial data on the company’s sales and even physical access to incoming receipts and PayPal accounts to collect payments, giving PayPal an informational advantage that bankers lack and a repayment advantage that other funding alternatives such as Merchant Cash Advance providers cannot match.

If the program is successful, it will fulfill a necessary goal for online retailing, one of the industries that has the most difficulty obtaining traditional loans.

However, the loans will not bring any benefit to small businesses that do not transact online, which could create another source of negative pressure on traditional businesses that are increasingly losing business to online sales. line.

For online merchants, their growing reliance on a single vendor, PayPal, could also have negative implications for the ecosystem in which they operate. How are small businesses responding to today’s news? Several online merchants I interviewed noted that loans won’t be a problem for their businesses because they don’t use PayPal, and having access to a loan of this size wouldn’t be enough of a reason to convert. In response to e-commerce expert Ina Steiner recent question “Would you be willing to turn to eBay’s PayPal unit for a loan?” all but one of the 37 respondents answered categorically “no,” citing reasons ranging from conflict of interest to concerns about PayPal’s efforts to legally circumvent being classified and regulated as a bank.

* Following the original appearance of this article, a financial expert offered the following analysis to express the cost of PayPal’s fees in annual interest, which is the terminology borrowers are most accustomed to seeing. In the first example above, using 30% of receipts and a $ 281 fee in exchange for an advance of $ 8,000, for a small business with $ 100,000 in annual PayPal transactions ($ 8,333 / month), the advance would be repaid in 100 days at an annual rate of 25.27%. This is the longest term that this loan can be outstanding based on PayPal’s 8% cap. For an SME with $ 330,000 in annual Paypal transactions ($ 27,600 / month), the advance would be reimbursed in 30 days at an annual rate of 86.3%. Using the example of 10% of receipts and fees of $ 947 for an advance of $ 8,000, a SME with $ 100,000 of annual PayPal transactions ($ 8,333 / month), the advance would be repaid in 327 days at an annual rate of 25.2%. This is the maximum term of this loan based on PayPal’s 8% cap. For an SME with $ 330,000 in annual Paypal transactions ($ 27,600 / month), the advance would be reimbursed in 99 days at an annual rate of 83.9% *

What about your own business? If you were qualified, would you accept a small business loan from PayPal? And what would your business do with $ 20,000 in additional cash? I can’t wait to hear your thoughts.