Business & Technology PayPal Makes Small Business Loans As loans to large companies continue to increase, filling
Question:
Business & Technology PayPal Makes Small Business Loans As loans to large companies continue to increase, filling the gap for small business loans are a number of technology companies, including PayPal, a well-known electronic payments company. With transaction data from small business customers and part of a strategy to expand its service offerings, PayPal Working Capital is providing loans to its customers who run small businesses.
PayPal's working capital business loan allows a company to pay back the loan on a daily rather than monthly basis as the small business gets paid. Repayment is based on a fixed percentage of the company's daily sales. No credit check is required, and no periodic interest rate is charged. A fixed fee is paid in advance, and the loan is paid back daily by determining the percentage of each day's PayPal transactions. Although payment is easier, it is difficult to calculate an annual interest rate for PayPal's loan product. A PayPal spokesman said the company is looking for ways to help customers make an "apples to apples comparison" with other types of financing, and currently the company claims that interest rates run about 10%.
Upon approval, the funds are transferred within minutes and available immediately for use. With a loan limit of as much as 30% of their annual PayPal sales, up to a maximum of $97,000 for the first loan, credit decisions are made against a company's future revenue stream, which is well documented through PayPal's payment system. Merchants repay more when sales volume is high and less when sales are low. Payments are a percentage of sales agreed upon beforehand.
PayPal acknowledges that data drives its decisions to lend wisely, and because payments are made on a daily rather than a monthly basis, risk and delinquency rates are reduced. PayPal, part of the financial technology or fintech industry, is using technology to make financial services more plentiful and efficient.
a) From a strategy standpoint, do you think it is smart for PayPal not to perform credit checks on possible borrowers? Why or why not?
b) Is this approach a good alternative to small business lending from traditional banks? Discuss the pros and cons of alternative lenders like PayPal.
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins