PayPal Working Capital: What you need to know (+ alternatives)

Today, founders face a myriad of choices when it comes to getting capital to run their businesses. 

Embedded finance is one option to look at for speed and ease of access. This includes financing products built into platforms you already use, such as PayPal’s Working Capital loan. Though embedded financial products can quickly underwrite your repayment ability based on on-platform transactions, it’s important to understand the loan’s requirements and total cost.

Here’s what you need to know about PayPal Working Capital and its benefits and limitations, as well as alternatives to consider that may better suit your business’s capital needs. 

PayPal Working Capital offers cash advances to businesses that already process sales through the PayPal platform. It's often categorized as a merchant cash advance (MCA) because repayment is directly tied to a percentage of future sales, and the cost includes a fixed fee, instead of a stated interest rate. (This fee is called the “factor rate” with MCAs, but with PayPal Working Capital, it's simply referred to as a “fixed fee.”)

Eligibility and review

To qualify for PayPal Working Capital, your business must:

1. Have a PayPal Business or Premier account that’s been active for at least 90 days
2. Have processed at least $20k in annual PayPal sales as a Premier account or $15k as a Business account 
3. Have already paid off any existing PayPal Working Capital Loan prior to applying for a new one

Unlike other loan products, your eligibility is assessed based on your PayPal transaction history, rather than a hard credit inquiry. This can make it an accessible option for founders who might not have a strong personal or business credit profile yet.

Repayment structure

The core difference between a PayPal Working Capital loan and a traditional loan is how they're repaid. Here’s how it works with PayPal Working Capital:

• Fixed percentage: You agree to a fixed percentage of your PayPal sales (the "holdback").
• Automatic deduction: Repayments are automatically deducted from your incoming PayPal sales until the full advanced amount is repaid, plus a one-time fee.

This structure offers helpful flexibility: On slow days, you’ll pay less, and on busy days, you’ll pay more. However, since repayment is linked directly to your PayPal sales, it limits your flexibility for managing cash flow across other bank accounts or payment channels.

The fine print: PayPal requires a minimum of 5% to 10% of the total loan amount, depending on your loan terms, every 90 days. That means you’re responsible for paying this fixed fee even during extended slow periods.

Fees and terms

PayPal Working Capital doesn’t charge interest. Instead, it charges a single, fixed fee — similar to a factor rate used in other merchant cash advances.

The advance amount and fee are based on your sales history, and the holdback percentage is selected by the borrower from a few options.

For example, if you borrow $10,000 and the fee is $1,000, you'd owe a total of $11,000. If you choose a 10% holdback, $10 of every $100 in PayPal sales would go toward repayment until the full amount is repaid.

PayPal Working Capital can provide a seamless application process, easy access to capital, and a flexible repayment plan. But it also comes with drawbacks, such as underwriting based on a single source of payments, limited access to capital, and costs that are often high and confusing.

Here’s where it stands out

The benefits of PayPal Working Capital include:

• Speed and simplicity: Approval and funding often happen almost instantly, with minimal paperwork.
• No hard credit pull: The absence of a hard personal credit check requirement makes it an accessible option for early-stage or sole-proprietor businesses.
• Revenue-based repayment: Repayment automatically flexes with your PayPal sales, reducing the strain of a fixed monthly payment during slower periods.

Drawbacks to consider

The downsides of PayPal Working Capital include:

• Tied to PayPal revenue only: Your loan amount and approval terms are only based on PayPal transactions. If your business diversifies sales channels, this loan restricts your working capital from those new channels.
• Fixed capital amount: Your access to capital tops out at the approved loan amount. Unlike a working capital line of credit, you can't reuse the funds until the advance is paid off in full.
• High effective (and opaque) cost: While a single fee may seem straightforward, the short repayment period can translate to a very high (and confusing) implied APR.

Use the steps below to convert the cost of a fixed-fee loan product into an annualized interest rate to compare loan products: 

1. Divide the fixed fee by the total principal loan amount.
2. For example:, a $1,000 fee on a $10,000 loan
3. $1,000 (fee) /$10,000 (principal loan amount) = 0.1 (decimal-based cost)
4. Multiply the decimal-based cost from the first step by 365.
5. Example: 0.1 x 365 = 36.5
6. Divide the result by your expected repayment period (in days). 
7. For example, divide by 365 days if you expect to repay the loan in one year, or divide by 730.5 for two years, and so forth. You’ll notice that the sooner you pay off the loan, the higher the implied annual interest rate is.
8. 36.5 / 365 = 0.1 → 10% annualized interest rate when repayment = 1 year
9. 36.5 / 730.5 = 0.05 →5% annualized interest rate when repayment = 2 years
10. 36.5 / 1095.75 = 0.033 → 3.3% annualized interest rate when repayment = 3 years

If your business transacts over multiple platforms, generates predictable revenue, or you’re seeking lower costs and ongoing access to capital, you should explore alternatives to PayPal Working Capital.

Mercury IO credit card

For ambitious founders, a corporate credit card, like Mercury IO, can offer both spending flexibility and high credit limits, without requiring a personal guarantee or a personal credit check. Benefits include:

• Flexibility: Unlike PayPal, your limit is based on your total cash in your Mercury account, which offers more control than you’d get by tying your capital to a single sales channel. And you can use it for any business expense.

Cost: The Mercury IO Credit Card charges no annual fees and no interest because account holders pay their statement balance in full each month.

Platform-specific capital (Stripe, Shopify)

Stripe Capital and Shopify Capital operate similarly to PayPal, using revenue generated on their platforms to underwrite and repay the advance. These are a good fit if nearly all your sales run through one of those systems, since they offer the same speed and ease of access.

Working capital loans and lines of credit

For a potentially lower total cost of capital, consider a traditional working capital loan or a business line of credit. These offer lump sums or revolving access to capital, often with fixed interest rates (APR) that can be more favorable than a factor rate. They’ll give you access to flexible funding that you can draw on as needed, so you’ll only pay interest on the amount you use.

The decision between a PayPal working capital loan and an alternative comes down to three main questions.

1. What is your business model and sales pattern?

• E-commerce: If a very high percentage of your revenue is generated through a single platform, that platform's capital offering will be the most seamless and fastest, but also potentially the most costly.
• SaaS or subscription: If your business has recurring, predictable revenue, a solution like the Mercury IO credit card or recurring revenue financing (RBF) aligns funding with your predictable inflows. 
• Services firm: If you rely on large, less-frequent invoice payments (long accounts receivable cycles), a working capital loan (WCL), or line of credit can bridge the gap more effectively, especially when coupled with invoice financing.

2. How much repayment flexibility do you need?

• Fixed percentage repayment: Embedded loans (like PayPal's) are ideal if you want repayment to scale down when sales dip, but you must accept the high implied cost and tied revenue.
• Fixed monthly payments: A traditional term loan or line of credit offers predictable, fixed monthly payments, which are easier for forecasting. But this can strain cash flow during slow periods.
• Revolving credit: A corporate card gives you the longest window to pay off a balance (delaying cash outflow) and offers flexibility for everyday operational expenses.

3. What is the total cost of capital?

It’s critical to consider all fees, and not just the headline cost. To determine the total cost of capital, review these:

• Factor rate vs. APR: Convert the fixed fees of a merchant cash advance (MCA) into an estimated APR to compare it directly with bank loans or credit cards.
• Hidden fees: Don't forget to factor in any origination, funding, or administrative fees that MCAs often layer on.

Embedded financing, like PayPal Working Capital, can provide ecommerce founders advantages in terms of speed and accessibility. However, its costs and restrictions make alternative financing options, like Mercury’s IO business credit card, a better fit for founders who want low costs, recurring credit access, and a seamless eligibility process based on their complete financial picture. 

Compare your options with Mercury IO