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Why Paypal Working Capital Should Be An SMBs Go To Lender

Full transparency, my only relationship with PayPal is as a customer.

PayPal Working Capital was formerly Bill Me Later.

We’ve been using PayPal for 14 years and currently have three active accounts we use for selling online. 

Square is used for walk-in retail sales so we are able to separate Indiana cash and credit card sales for sales tax filing purposes.

Ironically 10% of all our online customers live in Illinois and now get a 10.25% discount from us as we are no longer collecting and paying sales tax in that state.

BTW – Illinois electronic sales tax filing program involves four computer pages with about 100 lines that one needs to pay attention to for accurate data input,

The Indiana DOR sales tax online form is seven boxes.

I’ve inherently never trusted banks which is another rabbit hole I’ll be diving through soon.

Especially after the 2008 financial debacle when if you remember Jon asking then Congresswomen Elizabeth Warren (who was on the congressional oversight panel set up to keep the banks honest – yeah right) on the now-defunct Jon Stewart show if the banks were being transparent about the 590 billion dollars US taxpayers forked over to them.

Spoiler alert, we were getting a $66 return for every $100 we gave them.

Watch the video below for the interview.

I thought I was done with credit card processors and gateways, you can read about some of my antics with those rascals, here.

We decided to reverse engineer our cash flow in favor of PayPal.

If you ask a lot of small business people what their primary KPI is you’ll hear everything from, web traffic to conversions to engagement.

Mine is and always will be – cash flow.

Cash flow volume is half the story, cash flow speed is almost just as important.

When we started using PayPal as our primary online cash register we would collect the money instantly if we use PayPal express but it still took the normal one to three days if we used PayPal to process credit cards.

AMEX took 3 or more days.

This brings another important distinctive benefit of PayPal.

You do not have to be PCI DSS compliant because you are not storing your customer’s financial information.

Becoming PCI DSS compliant means walking your website through several thousand steps (test) which even when you were given the green light you knew in your heart of hearts that a 13-year-old Ukrainian hacker could get whatever information they wanted.

Coming back on course the length of time to receive your own money is even more critical for drop shippers is like us.

With drop shipping, we prepay a distributor or factory who will ship the order on our behalf when we get to keep a processing fee without ever handling the merchandise.

Think bird cages.

Flat Top Bird Cage for Large Parrots by Prevue 3157 Silverado Black

Around 2007 through 2008 – American Express funding could take three days to receive meaning we used our own money or waited for the customers for money to pay for the order in the hopes that nothing would stop our funding from their customer before paying for the merchandise.

The decision was always based upon that week’s cash flow.

We needed to use banks to pay bills like insurance companies or FedEx or UPS that require ACH transactions.

Transferring money from PayPal to our commercial bank took 2 to 3 days.

Then PayPal began to up their game and introduced instant funding for any and all credit cards – game changer.

A year later PayPal allowed the transfer of money from our PayPal account to our commercial bank in one business day – game changer.

Earlier this year (2019) they allow you to transfer money within literally under 10 minutes for a 1% fee – game changer.

1% might sound like a lot but it’s a helluva lot cheaper than the cost of an overdraft.

Here’s where we circle back to the lending thing.

I sought funding in the following ways.

I tried the Duman Entrepreneurship Center @ JVS Chicago that was sanctioned by the city of Chicago and the state of Illinois.

Duman Entrepreneurship Center @ JVS Chicago 

I was literally mentored for six weeks.

Wrote a 12-page business plan.

Did a SWOT analysis.

SWOT Analysis Templates to Download, Print or Modify Online

Collected 300 pages of documentation

And was turned down for $25,000.

2 Taquerias were funded during my round for that amount according to the report.

I have relationships with Chase and Citibank which both turned us down for $15,000.

One late at night I read about Kabbage.

Without submitting any documents, having any meetings or been subjected to any credit checks they gave me a $4000 line of credit in under 10 minutes.

The new “banks look at social media followings as people and place with a large social media presence most always pay their loans.

We have 260,000 Facebook fans and we’re on several other social media platforms. 

It blossomed over the years to a $60,000 line of credit which we borrowed and repaid into the mid-six figures.

I did not care for their business model although you could literally borrow $10,000 on demand you faced a steep payback.

You had a window of 10 or 12 days to pay the minimum and at one point I was paying back upwards of $4000 a month.

We have ended our relationship with Kabbage.

The banking world has changed enormously since the great recession.

This article lists the Top 10 Cloud Banking Solution Providers 2017.

I currently walk across the street to J.P. Morgan Chase housed in a behemoth 2 story ceiling height building (originally Lowel savings and loan still having 12 teller stations) and try to calculate the cost to cool it all summer.

front doors chase bank lowell indiana

I could work out a formula knowing the cubic displacement of the building and it’s A/C’s BTU output.

We just paid our first summer months Nipsco bill for $179 cooling about 4,000 square feet.

Chase has to be paying $1500/mo or more.

Most of the time, the staff outnumber customers 3 to 1.

What do you people do there all day, he asks rhetorically.

Do they keep the building close to subzero because they make the men wear a vest, business shirt and tie, he asked rhetorically again.

How important is having a brick bank?

Back on asphalt (having run off-road for a moment).

Then about four years ago PayPal came out with their PayPal Working Capital program.

A simple application which takes about three minutes and upon approval you’re given a credit line up to 1/3 of your annual revenue.

Having kept my money in PayPal, doling out about 20% of our cash to the banks hurt us when it came to borrowing from conventional brick lenders, but PayPal knew our precise cashflow.

You pay a fixed fee upfront so you are not concerned about interest growing as you pay off the loan.

If you borrow X the fee will be Y, you are given many choices.

A deposit funds directly into your PayPal account within a minute and shows the overall charge of X (the loan) plus Y (the fee) in your loan dashboard about 72 hours after the money has populated your account.

Which is when payback begins.

Payback is a percentage of every sale so it really breaks it down into micropayments which I’m fond of.

You can also choose the percentage from 10% to 25% of every order which is deducted simultaneously with the customer’s payment and at the end of the day the accumulation reflects the new amount owed.

We’ve taken between 9 months and 18 months to pay back the prior three loans – its pretty painless.

You agree to make a minimum payment of Z (5% of the total loan) every 90 days.

We normally hit that minimum payment within the first 30 days of each ninety-day time frame.

And here’s where it gets really cool and why we have multiple PayPal accounts.

Once we moved into Lowell we were relatively light on inventory because we did not want to pay to move inventory which would have just piled on costs to what we sell to our customers.

So after arriving in Lowell, paying off the last loan around that time by design, we borrowed our largest amount ever applying it to re-building our inventory and new retail store environment.

There was also a sizable auto repair bill having blown two seals on our Ford Escape after dragging a trailer between Chicago and Lowell almost daily for 2 1/2 months.

We next found ourselves in the middle of dog days of summer with temperatures soaring across the country and people not interested in website shopping for their pet bird.

(One early July day the Dow moved 3%.)

No one wanted to be looking at computer screens.

So I migrated to another PayPal account in which there will be no deductions for about 30 days which is when I will decide to collect money using the PayPal account attached to PayPal Working Capital loan, once more.

That provides me 10% of this month revenue to help keep the ship upright.

PayPal doesn’t care, they got their fee upfront and I don’t have to worry about compounding interest.

Because I don’t foresee in us borrowing a large sum in the relatively near future I can take my time paying off this loan using my revenue as long I’m making that minimum payment Z (Z = 5% of the loan) as a per the PayPal Working Capital contract, every 90 days.

In conclusion with PayPal I get my money instantly, can transfer it to my commercial bank almost instantly, borrow six figures in under 10 minutes and pay back the loan using my daily sales but having a throttle to giving me total control of our finances.

Written by Mitch Rezman
Approved by Catherine Tobsing

 Your zygodactyl footnote

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