PayPal's SMB lending division hit $10 billion in a major acceleration

This is an excerpt from a story delivered exclusively to Business Insider Intelligence Payments Briefing subscribers.

PayPal announced that its small business (SMB) lending division, comprising both PayPal Working Capital and business financing, hit $10 billion in cumulative volume.

That milestone highlights the division's recent acceleration, as 40% of its overall volume has been issued since November alone, even though it launched in 2013. In total, PayPal has issued 650,000 loans to 225,000 unique sellers.

Most of these loans come from PayPal Working Capital, which allows merchants to apply for an interest-free loan up to $200,000, receive funds near instantly, and repay the loan plus a flat fee as a percentage of daily sales, PayPal VP of Global Credit Darrell Esch told Business Insider Intelligence.

PayPal has capitalized on a need for capital among small businesses — a segment with room to expand. Esch told Business Insider Intelligence that small business lenders are still hurting for capital, which has allowed PayPal to find a niche in targeting the smallest sellers.

The average US Small Business Administration (SBA) loan is $420,000, while PayPal's loans hover mostly below $50,000, with Working Capital loans averaging below $20,000. Esch said that PayPal has done well with smaller merchants for two reasons: It targets firms that already have relationships with and trust in PayPal by nature, and it offers transparent lending options.

That's helped PayPal achieve its current small business loan volume of about $1 billion per quarter, compared with Square Capital, which issues roughly $500 million a quarter, for example. PayPal is poised to continue growing in the space as it attempts to meet “universal” demand: So far, it's added both Germany and Mexico (through a partnership with lender Konfio), and we expect them to enter more markets soon.

Delving into merchant services has remained a focus for PayPal as it works to tighten relationships with sellers to boost a lucrative segment of its business.

Growing its SMB lending division helps PayPal's core business by boosting merchants' sales. Merchants typically use the loans for inventory, equipment, cash flow, and marketing — all features that can propel their overall businesses: The average recipients of Working Capital and business financing loans that grew revenue saw it grow by 24% and 21%, respectively, mostly within the first three months. Improvements to seller-side sales ultimately helps PayPal, because it brings more volume into the network, which translates to more revenue. It can also deepen relationships and improve loyalty, since loans are sticky, with many merchants returning for three or more rounds.

Improving merchant results fits into PayPal's bigger picture, as the group accounts for the vast majority of PayPal's volume. Merchants comprised 8% of PayPal's user base in Q1 2019, but over 90% of volume on the network. The firm has been ramping up merchant-facing offerings, like Funds Now, which gives merchants instant access to funds. Continuing to build out those offerings as merchant services TPV accelerates could be a key force in the company's results moving forward.