5 Reasons PayPal Small Business Loans Might Not Be Right for You

If you've heard of PayPal Working Capital, you're probably wondering if it might be a good financing option for your small business.

The program, which began just two years ago, offers PayPal merchants (as in, merchants who use PayPal for their transactions) the ability to borrow up to 8% of their annual revenue and then automatically deducts a set percentage of incoming receipts until the loan is paid off. In its short time, Working Capital has already made $1 billion in loans to small businesses, as the company reported last week.

And this isn't a huge surprise. PayPal Working Capital seems like a win-win for the company and merchants alike. The risk is low for PayPal-since they can see all of the historical cash flows of their merchants, they know exactly how healthy each one is. For merchants, the program is convenient and less expensive than many other financing options out there. The application process, for example, takes just minutes with no credit checks and no extra fees. Also, because payments are automatic and based on a percentage of revenue, merchants never have to worry about forgetting a payment or a payment causing them to be over-drafted.

So is PayPal Working Capital the perfect lending option for a small business? As with so many things in lending, it depends. There are certain aspects of the program that make it not ideal for every small business. It pays to know about Working Capital's limitations before you go too far down the road of considering it for your small business.

If any of these five drawbacks apply to you, you might want to pass on PayPal Working Capital:

1. You must have done plenty of business on PayPal

Yes, the PayPal Working Capital application is fast. At an estimated five minutes and without the hassle and worry of credit checks, it's bound to get small business owners' attention. But there is a reason for that fast application process.

When extending financing to a small business, PayPal doesn't go off of your credit score or many of the other factors that banks and other creditors use, as stated earlier. Instead, they go off of the money that flows through your PayPal account. For this information to be reliable, however, they need a significant amount of it. For this reason, if you want to qualify for the program, you must meet these requirements:

"[Y]our business must have a PayPal business or premier account for at least 3 months and process between $20,000 and $10 million within those 3 months or within any time period less than or equal to 12 months."

With requirements like these, your small business might not qualify. For instance, if you don't conduct business on PayPal, the program isn't for you. If you do business on PayPal, but it's only in small volumes, it's also not for you. But those aren't the only things that could disqualify you...

2. You have to pass PayPal's "mystery" requirements

While the requirements above are clearly stated, they also seem to have some requirements that aren't so publicly stated. The complaint below, left on eBay community forum by an unhappy merchant, tells of this problem:

"We do over $500,000 a year in sales and we were turned down after getting a msg from paypal telling us to apply. We spoke to paypal and of course they came up with various reasons such as maybe our business is seasonal or not enough cash flow... Both are wrong... After pushing submit we were immediately turned down within three seconds, so obviously none of our info was even evaluated... Getting the invite letter means nothing."

The message of the story is, even if you get an email inviting you to participate in the PayPal Working Capital program, don't assume that you will qualify. While there are mostly positive reviews about the program, a significant number of complaints about the program targeted this very issue. When merchants are turned down, even when they meet the revenue and time on PayPal requirements, they often aren't privy to the reasons why.

3. The loan amounts might be too small for your needs

Sometimes your business just needs a small infusion of cash to expand its capabilities or invest in better resources. For these situations, PayPal's program may be exactly what you need, since it allows merchants to borrow up to 8% of their revenue that goes through PayPal.

But what about when you need a much larger small business loan? In this case, most small business owners are going to find that PayPal's loans fall short. Said one anonymous reviewer on SuperMoney.com:

"Many of my small business owners friends have loved getting smaller loans through them, but I needed something larger at the time. They only give out loans up to a certain amount, and that number is smaller than ordinary lenders. From what I've heard, they're fast and easy to use, but they just didn't work out for my particular needs."

4. The APR is higher than some small business loans from your typical bank

PayPal lets you choose what percentage of your revenue will be automatically deducted to pay off your loan, anywhere from 10% to 30%. As a result, the APR on a Working Capital loan usually ends up being about 15% to 30%.

This is better than what you'll find on comparable lenders like Kabbage or On Deck Capital, which tend to offer APR around 40% to 80%. However, if you qualify, you're likely to find lower APR on a small business loan from your local bank or credit union.

For this reason, it's highly recommended that you seek financing with a traditional lender before turning to online lenders, including PayPal Working Capital.

5. Once you get a PayPal Working Capital loan, you're stuck with it

As you've probably gathered by now, PayPal's Working Capital program was designed to work within the confines of their service. If a merchant were to take out a loan through the program, however, and then stop using PayPal, the company would have no way to collect loan payments from the merchant.

That's why, as part of the terms and conditions of the program, merchants agree to continue using PayPal until their loan is paid off in full. According to the company, if a merchant leaves PayPal before their loan is paid off, they must pay the full remaining balance immediately. If a merchant defaults on the loan, PayPal can seize funds from other bank or credit accounts connected to the merchant's PayPal account.

In short, don't take out a loan with PayPal unless you plan to stick with them for your business' payment processing needs.

Is PayPal Working Capital the right lender for you?

If you process a high volume of your revenue through PayPal, you can live with the higher APR, you don't need a very large loan, and you're planning on using PayPal for a while, then the answer is probably yes. Barring any problems from those "mystery" requirements mentioned above. Seriously, at a time when small business loan requirements from traditional banks are getting tighter, if you fit the bill, PayPal Working Capital might be just what you need to keep your small business growing.

To see how real customers rated PayPal Working Capital, visit our PayPal reviews page today!