PayPal is expanding a merchant credit program that uses payments data to vet borrowers and collect loans.

Called Working Capital, the service provides loans to merchants who already use PayPal accounts to accept payments. The program has been in pilot for the past several months with about 90,000 merchants, taking advantage of the visibility PayPal has in how these companies conduct business.

"As a processor we're in the middle of the cash flow," says Darrell Esch, vice president and general manager of small business lending at PayPal. "We have an existing relationship with these companies that can inform our decisions."

Using a merchant's transaction history to inform its decisions, PayPal can approve and fund loans in a few moments. "Unlike traditional loans where the merchant expects to wait for days, this can work much quicker," Esch says. "Most of the application is prefilled because we're processing the payments."

The loan's terms don't include a firm repayment date, as the loans are paid back as the merchant receives PayPal payments from its customers. The merchants can choose how much PayPal deducts from each payment to pay down the loan, and this amount determines the loan's fee.

Borrowers view a dashboard with a menu of choices on deductions and rates. For example, a loan of $8,000 with a 15% deduction would have a fee of $594. The more the merchant has deducted, the lower the eventual loan fee. If the merchant doesn’t get a PayPal payment on a particular day, there's no loan payment and no penalty. Lighter Capital uses a similar model, leveraging CRM data to determine loan terms.

After repaying the Working Capital loan, the merchant can apply for another loan from PayPal.

"It's inherently flexible, rather than six months or any kind of scary due date the money comes out a share of payments," says Brian Grech, senior risk manager and marketing for small business lending at PayPal.

The loans can be as large as $20,000, and PayPal hopes to offer higher loan amounts over the next couple of months as PayPal targets larger merchants, Esch says. While the program has initially made loans primarily to e-commerce merchants, the program could also apply to brick-and-mortar retailers that accept PayPal at the point of sale.

"Our motivation here is to help the merchant who does business with PayPal to sell more on our network," Esch says. "That merchants are mostly online now, but we can see where it would benefit offline merchants as well."

PayPal is working with WebBank, a Utah-based institution that also backs Bill Me Later, PayPal's short-term credit product.  PayPal did not indicate any relationship between its Bill Me Later and Working Capital products.

Beyond the potential disruption to banks, PayPal's business loan service may also take share from On Deck Capital and Kabbage, both alternative lenders that target small businesses. Kabbage uses UPS shipping data and Square to vet borrowers. 

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