Paypal emerges as small-business financing source.

• Author: Caley, Nora
• Position: STATE of the STATE

E-COMMERCE HAS CHANGED the way consumers buy goods and services, and now it might change the way small businesses borrow money and repay loans.

In September 2013 PayPal launched PayPal Working Capital, a loan source for small businesses that currently use PayPal for online payments. The borrower can apply for a loan without undergoing a credit check because PayPal already knows the company's sales history.

Some small business owners are happy to skip the forms and the wait.

"I think it took five or ten minutes from the application to having money in my account," says Scott Bennett, owner of the Denver-based furniture manufacturer Housefish. "It was pretty easy to get."

Instead of interest, there is a fee. The borrower repays the loan over time, from a percentage of sales every day. The borrower can choose the percentage.

"Payments change with the company's sales so that businesses with irregular revenue cycles can still comfortably seize new business opportunities and hire seasonal help, increase inventory for a busy season, aid cash flow, purchase new equipment, ramp up marketing activities or even open a new location," says Brian Grech, director of U.S. portfolio growth and optimization for small business lending at PayPal.

The example PayPal Working Capital offers on its website is a business with $100,000 in annual sales that takes out a loan of $8,000 for a fee of $445, then pays 10 percent of each day's sales as a loan payment.

"The first rule of business is don't run out of money," says Michael Bower, CEO of...