‘We call it Dream Fuel’: Behind the growth of PayPal’s SMB lending business

In just a few years, PayPal’s business financing solutions has serviced over 225,000 small businesses around the world with funding. Between PayPal Working Capital and PayPal Business Loans, the company has recently surpassed $10 billion of capital it’s leant out to SMBs

And when you speak to Darrell Esch, svp of credit at PayPal, you get the feeling PayPal is just getting started. We discuss this milestone and how PayPal’s lending business has evolved over the past five years. Darrell describes how PayPal financing solutions are positioned in an SMB market that’s getting significantly more competitive. Lastly, because PayPal is embedded in its borrowers’ businesses, Darrell shares some data about how businesses perform after tapping PayPal for capital.

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The following excerpts were edited for clarity.

From banking to PayPal

The transition from banking to PayPal has been fabulous. My hair got a little longer and the uniform has gotten a little more casual. I have a deep foundational education that I got in the banking industry, including running some lending businesses at one of the big banks. The energy level and the ability to execute with speed is so exciting in this fintech industry and PayPal, in particular. We're a mission-oriented company and the amount of good we can do at a one-to-one level is fantastic. It's been a great transition.

Banks competitiveness

Banks will always be pillars of their communities and have a part to play at large scale. We, and other fintechs, have the opportunity to step in and fill in some of the gaps.

PayPal's SMB lending business

With business financing, we got into the business about six years ago. We hit a milestone recently where we surpassed $10 billion in funding over 650,000 loans to 250,000 unique businesses. It took us roughly 23 months to distribute the first billion dollars of financing to our business clients. We're now doing more than $1 billion a quarter.

PayPal's two lending products

We have two primary products. We have PayPal Working Capital which we launched in 2013. That program lends from $1000 to $200,000 exclusively for PayPal members selling on the PayPal network. All of the underwriting decisioning is based on the flow of funds and the relationships and insights we have with these clients. Because it's a member program, everything is online. Clients start with a login. It's very streamlined.

It generally takes three to five minutes to get through the process. If you're approved and accept the offer, funds are deposited directly into your PayPal account generally faster than you can toggle over to see the money hit. This is financing within minutes. Repayment comes out as a portion of sales that come through the network. With Working Capital, our clients generally have revenues under a million dollars.

PayPal Business Loan is a little more traditional with weekly, set-amount payments that come out of a borrower's bank account. It's available for PayPal clients as well as first time PayPal users. These are loans from $5000 to $500,000. There's a lot of automation built into Business Loan and there's a traditional backend element of actual underwriters and client service reps to help complete applications. It's still generally executed within a couple of days. Our sweet spot for Business Loans are companies under $10 million in sales.

Both our loan products are short term. Business Loan is capped at a maximum one year term. For Working Capital, it's generally less than two years.

The evolution of the business

We got into this business because our customers were asking us to and we took a step by step, deliberate approach to starting it. We wanted to make sure this would be a viable, sustainable program. For example, when we started back in 2013, we capped PayPal Working Capital at $20,000. A year after we launched in the US, we expanded to the UK and Australia. At the end of 2018, we launched in Germany, as well.

With PayPal Business Loan, we tested a strategic partnership with Swift Financial. Like with Working Capital, our customers really pulled us into the space. And what we found -- and my biggest surprise -- was that there was high demand. When we acquired Swift in late 2017, we were maxed at $100,000 loans without manual underwriters.

We ran into a couple of barriers. We had larger clients that wanted financing above what we could do. Also, new merchants to PayPal didn't have enough underwriting information on the network for Working Capital. So, we needed to supplement that and our acquisition of Swift brought us a traditional installment loan.

Before and after borrowing from PayPal

We refer to our lending program internally as 'dream fuel'. Well more than half of the borrowing from Working Capital is for procuring inventory that they then sell on the network. For us, it creates that great flywheel effect. You're processing on our network, we can provide funding for your business and you sell more of your products.

For our clients, they're buying in bulk to get discounts. The opportunity to get financing in minutes is very valuable to them. Clients who are using Working Capital are seeing 24 percent average growth in sales after borrowing. 82 percent of those clients see that growth in the first three months. It's intuitive -- they're buying inventory they wouldn't have had the funds to purchase before. It's been a great driver for growth.

Well more than half our borrowers come back to borrow again from us. On average, we see our clients using the program about three times apiece.