Survey after survey will show that small business owners will tell you that obtaining capital is usually their number one problem. Not if PayPal has anything to say about it. The overall lending market in general is booming for entrepreneurs, but the traditional banks are not the source. Fintechs like PayPal have stepped in to fill the void of funding needs by small businesses.
The apparently risk averse brick and mortar crowd of banks are missing out on what is a huge lending opportunity. After all, small businesses as we know, account for over half of the companies in the U.S. Solving problems like this is where capitalism fills in, and allows an inefficient market to become prosperous.
The actual numbers behind PayPal’s growth in this sector are good. It hit a milestone, announcing it has provided more than $10 billion in loans to more than 225,000 small businesses around the globe. By the way, that happened in just 5 years.
General economic conditions remain healthy, though there is certainly no shortage of anxiety and worries about a recession kicking in. In addition to domestic growth, PayPal has seen greater than expected demand in Germany and Mexico. PayPal provides two main small business lending options: Business Loans and Working Capital.
PayPal’s VP and Commercial Officer of Global Credit Darrell Esch notes, “When it comes to the Business Loan operation for PayPal, loan recipients tend to use their relatively small doses of fresh capital for business operations, expansion, marketing and other such tasks. For loans made via the Working Capital operation, the new money tends to support inventory.”
One wonders how this will eventually play out on the balance sheets of these Fintech lenders. Ever since the recession of 2008 and 2009, traditional banks have been wary of lending 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. According to Funding Circle, the peer-to-peer marketplace operator for lenders recently found that small business lending accounts for just 0.7% of the overall balance sheets of U.S. banks. That stands at 2% in the UK and 0.6% in the Netherlands.
The traditional lenders are slow to the game, but as we have seen in the past, for good reason. PayPal is not alone among Fintechs who are involved in this space. OnDeck, the previous leader in small business alternative lenders, along with Kabbage and Square Capital round out the number three and number four spots, respectively. Not only do the figures suggest ramped up competition between alternative and traditional lenders, but within the alternative and marketplace lending communities.
With expanding Fintech options and positive loan results, alternative financing looks like it is here to stay. For instance, some 82 percent of merchants that have taken the capital from PayPal, either online or via physical store operations, reported growth after taking the loans. More specifically, PayPal said that the small businesses that experienced growth after accepting PayPal Working Capital business loans saw revenue increase by 24 percent on average. On the Business Loan side, that figure stands at 21 percent. This is why the engines of small businesses need capital to survive and grow. Let’s keep giving it to them.