PayPal (PayPal Holdings) has agreed to acquire small business online loan company Swift Financial for an undisclosed sum. The deal is expected to close by the end of 2017.
Delaware-based Swift Financial offers credit to small businesses through loans and advances. The deal will increase small-business owners’ access to capital via loans of up to $500,000.
PayPal has been operating PayPal Working Capital since 2013 and lent about $3 billion in loans to 115,000 small businesses.
PayPal’s Working Capital program uses previous sales processed through PayPal as a basis to determine eligibility for loans. Currently the maximum loan amount PayPal offers is $97,000 on eligible sales.
The PayPal Working Capital loans do not require a business owner to guarantee the loans personally. Repayment is simplified through daily withdrawals by PayPal from the PayPal balance. The loan payment is calculated from a chosen percentage at the time of loan origination.
For example, if your businesses transacted $1,000 in sales yesterday and you picked a 10 percent load repayment schedule, PayPal Working Capital would deduct $100 for repayment from your PayPal balance.
All PayPal Working Capital loans are structured as a fixed cost loan. PayPal tells you exactly how much the loan costs regardless of how long it will take you to pay it off. There is a stipulation that you have to pay off at least 10% of the total loan (principal plus loan cost) per quarter.
Most PayPal Working Capital loans based their anticipated repayment schedule at about 12 to 18 months with a loan cost based on an interest rate percentage in the mid 20s.
SWIFT FINANCIAL OPENS NEW DOORS FOR PAYPAL
Online lending became a primary source of capital after banks retreated from small business loans during the 2007-2009 global financial meltdown.
Founded in 2006, Swift Financial has helped over 20,000 business gain access to capital.
Most loan applications the company processed undergo a more stringent review of the company’s and owner’s finances. Swift Financial would typically offer shorter loan terms to businesses and allow them to build credit over time.
This way they reduce the lending risk and can offer a more standard loan product. Also, in many cases, business owners personally guarantee the loans.
Loans are typically paid back with weekly or monthly automatic withdrawals from the business bank account.
Through the years the company developed sophisticated credit scoring and pricing tools & data. PayPal is using this acquisition to provide it the technology and historical data to increase Working Capital loans up to $500,000.
THE LOAN PRODUCTS ARE DIFFERENT
In the short term, borrowers that use PayPal Working Capital should not see any changes. The loan models are different, and the deal first has to close and then PayPal has to decide how to incorporate the Swift Financial loan products or methodology into their offering.
PayPal may choose to offer the Swift product through a different loan application process. But instead of withdrawing from the business bank account, the loan would be repaid from the PayPal balance.
Or PayPal may find a way to incorporate the Swift loan data to create a product based on its current Working Capital fixed loan cost product. But use the historical data from Swift to fine tune the approval process to offer larger loan amounts.
Have you used online lenders for your business? Let us know your thoughts about PayPal expanding in this market in the comments section below.