PayPal sees YoY drop in receivables purchased; refrains from 'merchant cash advance' terminology
The recent earnings report from PayPal reveals a few interesting stories about the companies' lending and working capital offerings and how they describe them in their earnings calls versus what's on their financial statements. The drop in receivables is certainly a focus but we also want to discuss why they keep the word merchant cash advance out of reports.
Paypal's Merchant Receivables and Lending Products
Paypal's 10-Q filing provides insights into the company's Merchant Receivables segment, including its PayPal Working Capital (PPWC) and PayPal Business Loan (PPBL) products. In the quarter ending March 2024, it's reported that PayPal purchased $419 million of receivables, however in the same quarter of 2023 it was $666 million, a large 37% drop. They didn't explain why this was and I did not uncover their expectations for the future but one thing I know is there are more business financing products out there than ever before so origination is a fierce battle.
The PayPal Working Capital product allows merchants to borrow a certain percentage of their annual payment volume processed by PayPal, with a fixed fee charged based on the merchant's credit assessment. Repayment is made through a fixed percentage of the merchant's future payment volume processed by PayPal.
So in other words this is a merchant cash advance but Paypal and many other companies use this different terminology because of the negative connotations associated with the term with its history of high cost and predatory lending business practices. PayPal uses the word 'advance' on its financial statements but refrains as much as possible when speaking publically about the product given the negative connotations.
Source: PayPal 10-Q Filing
Webank is the bank behind the PPWC but PayPal does all servicing. PayPal can classify and market the PPWC as a loan on their website but also as Working Capital which leads to them even defining what working capital is in their FAQs.
"Generally, working capital is the difference between your business's assets and liabilities. Businesses use working capital to run their business and pay for everyday expenses as well as invest in new projects and initiatives".
Working capital is described by most as the 'usage of funds', not a type of loan. However, the term working capital has become popular to substitute for the term merchant cash advance or revenue based financing so that customers aren't scared away.
It's important to point this out because most mainstream media misses or ignores this information when they discuss MCAs. Let’s point out that there are tiers to the MCA/Revenue Based Financing market. PayPal is in the top tier and then we categorize funders in a middle and a low tier.
It is the low end where most of the problems are but the public needs to be informed that these top-tier companies are offering the same product helping thousands of businesses gain access to billions in capital every year so they aren't pushed away from the product overall.
Beyond the top tier, there are dozens if not hundreds of direct funding companies that operate successful businesses with reasonable cost offerings given the risk that help small businesses gain the capital they need.
Lastly, on PayPal earnings, they reported that in 2023, its gross charge-offs for these lending products declined to $38 million, down from $228 million in 2022.
SBA Lender and Development Company Loan Programs (SOP 50 10 7.1)
See the original SOP here
The document titled "SOP 50 10 7.1 effective 11.15.23.pdf" is the Standard Operating Procedure (SOP) 50 10 7.1 issued by the U.S. Small Business Administration (SBA) for its Lender and Development Company Loan Programs. This SOP, authorized by Kathryn Frost, the Acting Associate Administrator for Capital Access, came into effect on November 15, 2023. It serves as an update to the previous version, SOP 50 10 7, and outlines the policies and procedures governing the 7(a) and 504 loan programs offered by the SBA.
The SOP is divided into three main sections:
- **Section A: Core Requirements for all 7(a) and 504 Loans** - This section provides the foundational requirements applicable to both 7(a) and 504 loan programs. It includes chapters on primary applicant eligibility requirements, credit availability, special transaction structures, uses of proceeds, and ethical considerations, among others.
- **Section B: 7(a) Loan Program Specific Requirements** - This section delves into the specifics of the 7(a) loan program, detailing the requirements for standard 7(a) loans, 7(a) small and SBA Express loans, 7(a) CAPLines, 7(a) Export Trade Finance, and the E-Tran terms and conditions through disbursement for all 7(a) loans.
- **Section C: 504 Loan Program Specific Requirements** - This section focuses on the 504 loan program, covering eligibility through the submission of applications, SBA E-Tran terms and conditions through disbursement, and debenture pricing and funding.
The SOP emphasizes the importance of SBA Lenders and Certified Development Companies (CDCs) starting their review process with the core requirements outlined in Section A. It also highlights the necessity for SBA Lenders to comply with the detailed guidance provided for each delivery method in the applicable chapters of Section B and C.
Significant updates in this version include the introduction of SBA’s Risk Mitigation Framework for determining applicant eligibility, the use of technology to validate applicant data, and the emphasis on real-time validation of program eligibility to protect against fraud and ineligibility. The document also specifies the conditions under which SBA Lenders can request exceptions to policy and the procedures for such requests.
Appendices at the end of the SOP provide additional resources, including forms, acronyms, definitions, and specific requirements for environmentally sensitive industries and gas station loans.
This SOP is a comprehensive guide for SBA employees and SBA Lenders, ensuring that they adhere to the updated policies and procedures for the effective and efficient administration of the 7(a) and 504 loan programs[1].
Need a Loan for Your New Small Business?
Get the one that is right for you
Small business owners typically need to borrow money to buy equipment and supplies, pay employees, and otherwise finance their operations. To help you get a loan that fits your needs, these are some basics to consider on your road to success.
Apply now!
Improve your chances of getting a good loan
Start by having a well-prepared business plan. Showing proposed earnings can reassure lenders that a loan will be repaid.
Maintain a good business and personal credit history
Manage your business and personal credit well to increase the likelihood of being approved for a loan when you need it. A good credit score and history suggests to banks and other financial institutions that you have handled your finances well, and it can help you qualify for better loan terms, which helps save you money. For more information on credit reports and credit scores, visit FDIC Consumer News: Credit Reports and Credit Scores.
Apply now!
Monitor your credit report for accuracy
An accurate credit history is important to building and maintaining good credit. Many criteria go into a credit score, including your payment history and the number and type of loans that you have. Monitoring your credit report can help you ensure that the information is accurate, and if not, then you can take steps to correct it in a timely manner. Monitoring your credit report will also help you guard against identity theft, scams, and avoid unexpected credit issues when you go to apply for a loan. For more information on monitoring your credit and scams targeting small businesses, visit FDIC Consumer News: Your Small Business Deserves Big Support.
Comparison shop for government-guaranteed loans
The U.S. Small Business Administration (SBA) has several programs to help finance small business loans. SB Finance is a leading provider of all types of SBA loans.
Apply now!
Many SBA loan programs combine business coaching and technical assistance, as well as access to financing, on more flexible terms. One example is the 7 (a) Loan Program, SBA’s most widely-used loan guarantee program. The specific terms of SBA 7(a) loans are negotiated between the borrower and the participating lender, subject to the requirements of the SBA. According to the SBA, the 7(a) loan is often the best option when real estate is part of a business purchase, but it can also be used for: short- and long-term working capital, refinance current business debt, or to purchase furniture, fixtures, and supplies.
Such loans may have minimum dollar amounts, however, so if you need a loan for less than the lender’s minimum amount, ask your bank for a referral to a lender participating in the SBA Microloan Program. According to the SBA, its Microloan program provides small businesses with small, short-term loans — up to $50,000 — for working capital, or to buy inventory, supplies, furniture, fixtures, machinery, and equipment. Such loans are only available from specially designated intermediary lenders, which are non-profit organizations with experience in lending and technical assistance.
Apply now!
Understand the different types of financing
For most small businesses, operations are financed in three key ways (not including investments or loans from family and friends):
Personal lines of credit are commonly used, such as credit cards (either an owner’s personal card or a business card guaranteed by the owner) or home equity lines of credit (the small business owner’s home serves as the collateral), but there are risks.
A personal credit card is convenient, but it can be an expensive financing tool. Owners using a credit card may quickly find themselves taking on debt that cannot be reasonably supported by projected revenues from the business.
With home equity lines of credit, one problem is the potential loss of your home if you are unable to repay funds as agreed. Another problem with home equity lines is that in certain situations, banks can suspend access to a line or reduce the credit limit. For example, if the value of your home declines significantly below the appraised value, or if the bank reasonably believes you will be unable to make payments because of a drastic change in your financial circumstances, the bank may suspend your credit.
Business lines of credit provide a convenient way for a business to borrow up to a certain dollar amount and repay it in installments with interest over several years. Business owners should consider how and when the business will generate revenue to repay the loan. Short-term financing tools should not finance costly, long-term investments.
Business term loans, which establish a set dollar amount repaid in installments over three or more years, are recommended for purposes such as financing the purchase of equipment or a vehicle. Often, the asset that is purchased secures these loans. Term loans mean predictable payments for businesses, but unlike lines of credit, a business may have to make a new application if it needs to borrow additional funds.
Apply now!
Protect your personal accounts
Keeping your business accounts separate from your personal accounts has some benefits.
All deposits owned by a corporation, partnership, or unincorporated association at the same bank are added together and insured up to $250,000, separately from the personal accounts of the owners or members.
Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds.
The separation makes it safe and easy to authorize employees to handle day-to-day business banking tasks without being involved in your personal finances.
The Internal Revenue Service also recommends that you have a business checking account that is separate from your personal accounts because doing so can make recordkeeping for tax time easier. It may even be essential, depending on your corporate structure.
Business accounts can help establish convenient ways for customers to pay with credit cards or use checks made out to your business.
The need for separate accounts generally increases as a business grows or becomes complex. Just remember, consumer protection rules do not apply to transactions conducted by a business, whether it be a deposit account or loan.
Small business owners need to know what financing is available and what works best for them to be able to grow their businesses, and have the right resources to make their business a success.
Apply now!
Is the road to delighting borrowers paved by AI?
This article originally appeared in: Equipment Finance Advisor
By: Jeannette McNamara
Date: Dec 14, 2023 @ 12:00 PM
Equipment Finance Applications: Learning from Past Mistakes
For most of us in this industry, the first experience our borrowers have with us is our application process. We’ve all been there, dealing with an excessively long credit application full of industry jargon, boxes to check, and sections to fill out based on what boxes you checked. Gathering the needed information and documents, such as proof of income, business licenses, or financial statements, can be overwhelming, especially when instructions on what exactly is needed are vague.
Transitioning to digital platforms has made the process both better and worse. Auto-fill features speed up application input times, but semi-editable PDFs can complicate this. Uploading documents is easy, but optical character recognition (OCR) can struggle with information-dense forms. Conveniently, online applications can be completed at any time, but they often become a source of frustration when unclear errors occur, leaving applicants confused about the issue and uncertain about where to seek help or guidance.
Could the answer to these long-standing challenges be AI? Modern borrowers seek an application experience that's as intuitive and user-friendly as their everyday digital interactions. Imagine an application process that not only meets but exceeds borrower expectations. This is not a distant dream but a near reality with the integration of AI in equipment financing. Let's explore how AI can turn a tedious process into an empowering experience.
Financing Dreams Fast
In equipment finance, I often think of the borrower. Consider a seasoned tradesman, skilled in their craft but less experienced with digital technology – trying to complete an online application that feels foreign and complex. Their expertise lies in their trade, not in deciphering intricate forms and digital processes.
Or consider a small business owner, recently arrived in America – eager to invest in their future yet facing the daunting challenge of navigating complicated forms in a new language, a task made even more stressful by the limited time they have to understand and complete them.
Or imagine a mid-career professional transitioning to entrepreneurship – knowledgeable and ambitious yet finding the labyrinth of financial jargon and detailed documentation requirements overwhelming and time-consuming, potentially deterring their entrepreneurial aspirations.
These days, everyone expects online interactions to be intuitive and efficient. Borrowers shouldn’t be required to key in personal information multiple times, see fields that aren’t relevant to them, or sign documents in person. They should be able to ask questions and feel confident their application and attachments have been submitted correctly. They should feel the experience is personalized to them, responsive to their needs, and feel a dopamine rush when they click submit.
AI-Powered Applications
AI can reduce back and forth time with the borrower by making uploading of documentation smarter. Advanced OCR technology like Azure AI Document Intelligence, or AWS Textract can be trained to process handwritten applications directly into the Loan Origination System. However, even this AI process can be handicapped by bad or unexpected information in the uploaded form that needs manual clarification. Additionally, lenders often still need to manually check uploaded supporting docs like licenses or insurance policies for appropriateness and sign off, particularly if they are uploaded as a single file.
Google’s Document AI Workbench and Ocrolus have both been focusing on extracting vital underwriting details from uploaded documents, including those combined into a single file. Ocrolus comes pre-trained for many common documents in equipment finance, and Workbench can be trained. In either case, by recognizing and extracting data from different documents and then classifying those documents appropriately, we can ensure the right types of documents are uploaded, detect mismatched or fraudulent data, and verify that all necessary information, such as expiry dates and licenses are up to date – before the application is submitted. Borrowers are then able to verify their submitted information early, leading to enhanced precision of their contract details when they e-sign. This saves time, improves the borrower's confidence, and prevents unnecessary back and forth later in the process.
An Inclusive Financing Tool
Equipment finance borrowers are the average American. They represent a diverse cross-section of our population living out their American dream. Recognizing the diversity of our borrowers, many of whom may be navigating such applications for the first time and might not have strong financial knowledge, it’s imperative that the application process be accessible and user-friendly. AI chatbots, including both 'question/answer' and 'conversational' types, play a crucial role in this. They provide customized assistance, adapting their responses based on the user's needs and position in the application process.
AI's potential to personalize the application experience is big. It can ensure that forms and help are available in the borrower's preferred language, offer real-time updates on rates, and provide tailored suggestions for loan terms. It also can provide specific, guided responses to common questions, while conversational bots can engage in more dynamic interactions, offering suggestions, connecting users to resources, and escalating issues to human support when necessary. The technology's ability to remember past interactions with returning borrowers optimizes in-process and future applications, enhancing loyalty and creating a comfortable, familiar experience. Its ability to adapt and respond based on the user's position in the application process makes them invaluable for a diverse range of borrower applicants.
The Future of Delightful Applications
As we move from traditional, cumbersome application processes, it’s clear that the borrower experience of the future will hinge on the integration of AI. When engineers created ChatGPT they likely were not thinking about lease or loan application forms for heavy machinery or warehouse robots. Luckily, the use for different AI and machine learning technologies is truly endless, and we can integrate them into a small piece of our industry and have a tremendous impact.
AI-driven technologies will change the equipment finance application process, making it not only fast and easy but also incredibly accurate and personalized to each borrower's unique needs. Our borrowers come from all walks of life, and each of them deserves the opportunity to finance their dreams. With AI, we can make this historically messy, anxiety-ridden process a delightful experience for everyone.
As you’re planning your technology roadmap, consider these pivotal questions to help shape an AI-driven borrower experience that is both intuitive and personalized:
Does the application process align with the borrower's need for simplicity and efficiency, while still collecting enough vital information to make a good credit decision after submission?
Can your application adapt to the diverse needs of borrowers, especially in terms of language and accessibility?
Is AI being leveraged to build a deeper connection with your borrowers, personalizing their journey and fostering loyalty through a delightful experience?
AI is not just a tool; it's a means to humanize and enhance the equipment finance application process. It’s the cornerstone to creating a borrower-centric, efficient, and empowering loan application process. By catering to the diverse educational and cultural backgrounds of borrowers, AI can transform a historically challenging process into an empowering and delightful experience for all.
Small Business Owners Pessimistic About Future Business Conditions
NFIB’s Small Business Optimism Index decreased 0.1 point in November to 90.6, which marks the 23rd consecutive month below the 50-year average of 98. Twenty-two percent of owners reported that inflation was their single most important problem in operating their business, unchanged from October but 10 points lower than this time last year.
“Job openings on Main Street remain elevated as the economy saw a strong third quarter,” said NFIB Chief Economist Bill Dunkelberg. “However, even with the growing economy, small business owners have not seen a strong wave of workers to fill their open positions. Inflation also continues to be an issue among small businesses.”
Key findings include:
Owners expecting better business conditions over the next six months increased one point from October to a net negative 42 percent seasonally adjusted.
A net negative 17 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from October and the lowest reading since July 2020.
Forty percent (seasonally adjusted) of owners reported job openings that were hard to fill, down three points.
Seasonally adjusted, a net 30 percent of owners plan to raise compensation in the next three months, up six points from October and the highest since December 2021.
The net percent of owners raising average selling prices decreased five points from October to a net 25 percent (seasonally adjusted).
The net percent of owners who expect real sales to be higher increased two points from October to a net negative 8 percent (seasonally adjusted).
As reported in NFIB’s monthly jobs report, owners’ plans to fill open positions remain elevated with a seasonally adjusted net 18 percent planning to create new jobs in the next three months. Overall, 54 percent reported hiring or trying to hire in November. Of those hiring or trying to hire, 93 percent of owners reported few or no qualified applicants for the positions they were trying to fill.
Sixty-one percent of owners reported capital outlays in the last six months, up four points from October. Of those making expenditures, 41 percent reported spending on new equipment, 23 percent acquired vehicles, and 17 percent improved or expanded facilities. Eleven percent spent money on new fixtures and furniture and 6 percent acquired new buildings or land for expansion. Twenty-three percent (seasonally adjusted) plan capital outlays in the next few months.
A net negative 17 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, remaining the lowest reading since July 2020. The net percent of owners expecting higher real sales volumes improved two points to a net negative 8 percent.
The net percent of owners reporting inventory gains increased three points to a net negative 3 percent. Not seasonally adjusted, 14 percent reported increases in stocks and 16 percent reported reductions. A net 0 percent of owners viewed current inventory stocks as “too low” in November, up three points from October. By industry, shortages are reported most frequently in the retail (14 percent), finance (13 percent), and services (10 percent) sectors. Shortages in construction (8 percent) have been reduced because home sales have slowed dramatically due to higher interest rates. A net negative 3 percent of owners plan inventory investment in the coming months.
The net percent of owners raising average selling prices decreased five points from October to a net 25 percent seasonally adjusted. Twenty-two percent of owners reported that inflation was their single most important problem in operating their business, unchanged from last month. Unadjusted, 14 percent reported lower average selling prices and 36 percent reported higher average prices. Price hikes were the most frequent in finance (48 percent higher, 10 percent lower), retail (47 percent higher, 9 percent lower), construction (42 percent higher, 11 percent lower), wholesale (32 percent higher, 16 percent lower), and services (30 percent higher, 9 percent lower). Seasonally adjusted, a net 34 percent of owners plan price hikes.
Seasonally adjusted, a net 36 percent of owners reported raising compensation, unchanged from October. A net 30 percent (seasonally adjusted) plan to raise compensation in the next three months, up six points from October and the highest reading since December 2021. Eight percent of owners cited labor costs as their top business problem.
The frequency of reports of positive profit trends was a net negative 32 percent, unchanged from October. Among the owners reporting lower profits, 36 percent blamed weaker sales, 16 percent blamed the rise in the cost of materials, 14 percent cited labor costs, 9 percent cited lower prices, 6 percent cited the usual seasonal change, and 5 percent cited financing costs. For owners reporting higher profits, 60 percent credited sales volumes, 14 percent cited higher selling prices, and 11 percent cited usual seasonal change.
Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-five percent reported all credit needs met and 63 percent said they were not satisfied in a loan. A net 8 percent reported their last loan was harder to get than in previous attempts. Five percent reported that financing was their top business problem. A net 25 percent of owners reported paying a higher rate on their most recent loan.
The NFIB Research Center has collected Small Business Economic Trends data with quarterly surveys since the fourth quarter of 1973 and monthly surveys since 1986. Survey respondents are randomly drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in November 2023.