eBusiness Weekly
The small business lending market is booming and it’s not the traditional banks that are benefiting. Fintechs are leading the way. Case in point: PayPal. It hit a milestone, announcing it has provided more than $10 billion in loans to more than 225 000 small businesses around the globe.
The $10 billion mark comes a little more than five years after PayPal made its first loan. Today it has issued more than 650 000 loans through financing programs in the US, UK, Australia, Germany, and Mexico.
“It took PayPal twenty-three months to get to the first $1 billion in lending and now we’re hitting more than $1 billion per quarter,” said Darrell Esch, vice president of global credit at PayPal. “Demand has never been in shortage.”
Ever since the recession of 2008 and 2009 traditional banks have been wary to lend to small businesses. For good reason. Many don’t make it past the two-year mark, let alone five years, making them risky borrowers for banks.
With banks sitting on the sidelines, fintechs have stepped up. These days there is a bevy of fintechs going after the small business lending marketplace. While banks have woken up to the need to provide funding to small businesses they are still slow to act.
Funding Circle, the peer-to-peer marketplace operator for lenders recently found SMB lending accounts for just 0,7 percent of the overall balance sheets of US banks. That stands at 2 percent in the UK and 0.6 percent in the Netherlands.
Funding Circle also found small businesses tend to receive terms on loans from banks that are worse than their larger rivals. They also have access to less financing and face approval standards that are more stringent.
The Federal Reserve’s most recent Senior Loan Officer Survey backs up Funding Circle’s claims. It found 24,7 percent of banks eased the interest rate they charge on loans to medium and large firms. That compares to 13,9 percent of banks that did the same for small businesses.
“Since the great recession, the traditional lenders have really slowed down and pulled back from small business lending. Small business lending never recovered like commercial lends,” said PayPal’s Esch.
The PayPal executive credits its growth in the small business loan market to its ability to offer loans that range in size from $1 000 to $500 000. Its maximum loan amount is higher than the average lent to small businesses by the US Small Business Administration. PayPal said that hovers around $420 000, taking as long as 90 days for approval.
“PayPal business financing programs can provide funding from $1 000- $500 000 for small businesses looking for both quick decision-making and immediate usage as an application decision that usually occurs within minutes or hours which, if approved, allows the business to start using the funds almost immediately,” said Esch.
That ability to access funds in a short time appears to be paying off for its small business borrowers. According to the payments company, small businesses tapping PayPal for a working capital loan saw an average 24 percent increase in growth with 82 percent of the businesses that experience growth seeing it in the first three months after accessing the loan.
Borrowers use working capital loans to purchase inventory, equipment, for marketing and to manage cash flow.
On the business loan front, PayPal said borrowers saw an average growth rate of 21 percent after borrowing the money with 88 percent of recipients seeing the growth in the first three months after accepting the loan.
The loans went to manage cash flow, purchase inventory and marketing initiatives.
In addition to increasing the size of the loans PayPal can offer small businesses, Esch credits the growth in loan volume to its expansion beyond the US, UK, and Australia.
At the end of 2018, PayPal entered the German market and in February inked a partnership with Konfio, an online lending platform in Mexico that uses alternative data to approve loans. With the partnership businesses in Mexico can receive funding by logging into their PayPal account, accessing Konfio’s platform and applying for the loan online.
In minutes’ merchants in Mexico will know if they were approved, the terms and repayment schedule. Esch said the plan is to bring on more lending partners.
While the executive thinks the demand for small business loans will continue unabated he said PayPal applies a healthy level of skepticism to the market.
After all the US economy is in the late innings of expansion and there are concerns that consumers could rein in spending, all of which would be bad news for small businesses and their ability to pay back loans.
“We recognise we are long in the cycle and do think the market will head into recessionary periods that could cause a slowdown in the sector,” said Esch.
“Having said that, I feel very good about the quality of these programs and the way we are managing risk. We see a long runway of growth here.” — Forbes.
