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.
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.
I think it's important to point this out because most mainstream media misses or ignores this information when they discuss MCAs. I will continue to point out, as others should, that there are tiers to the MCA/Revenue Based Financing market. PayPal is in the top tier and then I 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.
