One of our customers recently asked us if a working capital loan through PayPal was a good idea. I’ve seen things like this through Amazon and PayPal before, but I hadn’t really checked out them out before, so let’s take a look.

If you’re a PayPal business customer, PayPal will give you a cash loan in about five minutes and fund your account with the loan virtually instantaneously. You don’t need a credit check or to personally guarantee the loan. There’s no pre-payment penalty, and there’s no interest. In short, they make it quick and easy to get the loan.

Other benefits are that you only make payments after you have sales (you repay the loan directly from that sales revenue – PayPal gets paid before you do). All this happens with the payment of one single, fixed fee which is based on the amount you borrow as well as the portion of sales you repay vs. the amount you keep (in other words, the term length of repayment).

Sounds intriguing.

So I ran the numbers, and here’s what I found.

It’s a pretty decent deal if you need a one-time quick infusion of cash that you’re willing to pay back immediately. Let’s say you need $10,000 for a big inventory purchase that’ll take you to the next level and get you set up for ongoing sales and profitability… it’s quick, easy, and straightforward. You pay a flat fee that’s somewhere between 3.6% and 11% of the loan amount. If you do that once in a year, it’s cheaper or comparable to what you might get at a bank.

But… you have to pay it back a helluva lot faster. Repayment is super-quick as they want to get their money back asap. If you borrow $10,000, you’ll have it paid back with the first $50K+ (or so) of sales revenue you collect via PayPal. But if you need that money for longer than a couple of months, it’s probably best to go with a bank loan.

This loan is definitely NOT a good deal for using for your ongoing working capital needs. For example, if you took out one of these loans every month, you’re now paying 7% (or whatever the fee is) x 12 = 84% when you could get a good line of credit through a bank for 12%.

So overall, depending on your situation, a working capital loan might be a great option as long as it’s a one-time or a very infrequent source of capital. If you have ongoing capital needs, you should probably look elsewhere.

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