Charles Cooper, Contributing Writer
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A year after launching her online boutique, Ruth Lopardo doubled her business selling colorful kids’ clothing. She graduated the business from a spare room in her home in northern England to an office, too, but her success triggered a funding crunch familiar to many fashion retailers: The money she needed to quickly restock popular items was tied up in investing in new merchandise for the upcoming season.
When Lopardo, who funded her Love It Love It Love It boutique out of her savings, turned to her local bank to finance the purchase of the most sought-after items, a loan rejection left her “shocked and disappointed.” It also put her plans for growth in doubt.
“They just didn’t understand our business,” said Lopardo, a mom of two girls who came up with the idea of selling ethical and funky children’s wear while pregnant and tie-dying baby clothes with her oldest daughter. “I know that it’s e-commerce but it’s still just retail. I don’t have any bad debts, but the bank really showed me that they didn’t get it and they weren’t bothered to try and understand.”
Fortunately for Lopardo and other business owners like her, a new wave of financial offerings has emerged to fill the void of traditional banks, which dropped off such support to small and midsized companies starting with the 2007 to 2009 Great Recession. Lopardo got the key financing she needed through PayPal Working Capital, which offers funding in minutes to qualified merchants in the U.S., UK and Australia.
“It’s so cleverly done,” she said. “It feels like PayPal knows my business better than the banks and offered a product that was meant for me.”
It has been tough for small businesses to access capital from traditional banks even since the recession ended. More than half of such firms applying for credit in the U.S. last year reported they hadn’t gotten any, according to the Federal Reserve Joint Small Business Credit Survey. And in the UK, 39% of the small- and medium-sized companies applying for financing help in 2014 said it was hard getting funds from the first source they approached, a government survey of more than 5,000 businesses found.
“Banks are still very cautious with e-businesses,” said Sean Murray, editor of the financial newsletter DeBanked. “You can get a credit card for an e-business but not much beyond that.”
Credit constraints hit the smallest businesses, or those with less than $1 million in annual revenue, the hardest, according to Ann Marie Wiersch, a senior policy analyst at the Federal Reserve Bank of Cleveland. The rise in online alternative financing activity in recent years was likely fueled, at least to some extent, by the unmet demand, she added.
PayPal responded with PayPal Working Capital, which provides a cash advance to qualified merchants in the UK, and loans to them in the U.S. and Australia. Darrell Esch, vice president and general manager of the company’s small business lending group, said merchants told them “that access to capital was a real inhibitor to growth.” “There are a lot of great businesses out there with sound financials that are not having success getting financing from banks. That’s because most banks don’t understand online businesses,” he said. “But that’s something PayPal really understands. We saw a tremendous opportunity to help merchants access the capital they need to grow based on their PayPal sales volume.”
E-commerce firms can try newer financial products in the market such as peer-to-peer lending, online term loans and dynamic discounting, which have emerged as alternative sources.
For Lopardo, a former management consultant, there weren’t alternate financing sources that she felt confident with until she learned about PayPal Working Capital. Under the program, merchants can get up to 15% of their annual PayPal revenue (up to $85,000 in the U.S. and Australia, and £50,000 in the UK), and pay a single, set fee.
Paying back the money is simple: The funds are automatically deducted from a percentage of the company’s daily sales – a portion chosen by the business owner - until the loan or cash advance is repaid. Eligibility for Working Capital is based on a business's PayPal sales history.
Minutes after Lopardo was approved, she received the funds in her PayPal account.
“That was just great as I had some lines that were unexpectedly successful and now I could re-stock them before the warehouses were empty. It meant that I could keep my customers happy and I’m making more sales,” she said. She was also able to pay off the Working Capital advance and fee “very quickly and easily through sales of those products.”
The program is resonating with small businesses: In April, it crossed the $500 million mark, with some 40,000 firms receiving funding in the three countries, Esch said. Working Capital first launched in the U.S. in 2013, followed by the UK and Australia in 2014; plans are afoot to expand into other countries.
Lopardo is now onto her second round of Working Capital as she works to develop a branded fashion range to sell in her online boutique and other stores, improve her website and maybe grow her staff from a team of one.
“Plans like PayPal Working Capital are great because it allows me to make bigger strides at my own pace,” she said. “I see this being a very long-term relationship.”
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About the writer: Charles Cooper is a freelance journalist who has written extensively about technology and business for the last three decades. He was most recently the executive news editor at CNET.