PayPal's unconventional lending program attracts small businesses

Sassy Princess is not your traditional borrower.

Zakiyyah Yasin, owner of the kid-friendly spa in Woodbridge, Virginia, did not want to turn to a bank for a loan when she needed money for marketing last year.

Instead, she logged onto her computer and filled out a form. In less than a minute, she said, she had $5,000 in her account.

In all, she has taken out nine loans totaling $46,000 from PayPal Working Capital: a Timonium, Md.-based offshoot of the online payments behemoth.

Since it was established two years ago, the program has doled out $1 billion to more than 60,000 merchants that use its processing services, the company reported this week.

The idea is that borrowers - in this case, small-business owners who rely on PayPal for online orders - can borrow as much as 15 percent of their past year's sales, up to $85,000.

In exchange, PayPal collects 10 percent to 30 percent of their daily sales until the loan is paid off.

The program also has a flat fee, which comes out to an annual percentage rate of about 15 percent to 30 percent. (The average credit card interest rate, by comparison, is 15.01 percent nationally, according to CreditCards.com's Weekly Credit Card Rate Report. For business cards, the average interest rate is 12.85 percent.)

"Going to a bank just sounded too complicated," said Yasin, who founded Sassy Princess with her husband in 2010. "There would have been too many details involved."

The program is yet another example of the kind of offbeat lending system that has flourished in the aftermath of the financial crisis, as government regulations target the big banks that were at the heart of the meltdown.

"Coming out of the Great Recession, our merchants were telling us that access to capital was their biggest problem," said Darrell Esch, vice president and general manager of small business lending for PayPal Working Capital. "Traditional funding just isn't available to them."

Much like popular crowdfunding platforms, such as Kickstarter and Indiegogo, PayPal allows borrowers to secure funds without requiring a credit check or personal guarantees.

Instead, applicants are vetted based on their sales history.

"Businesses are being judged on business they've brought to us," Esch said. "From the merchant's perspective, this is funding in minutes."

The loans are handled by WebBank, a Salt Lake City-based institution.

PayPal would not disclose how many borrowers have defaulted on their loans.

Yasin, for her part, pays back 20 percent of her daily sales to PayPal and expects to be paid off by January. On the days she does not have any sales, she does not owe any money.

"If it's a slow month, I know I won't be struggling to pay them back," she said. "But if I have a good month, I know I'm that much closer to paying off my loan."