Technology companies step in to fund the small businesses that banks won't lend to

PayPal Working Capital has now provided over £400m to more than 22,000 small businesses in the UK and more than doubled its lending in the last year

Younger, smaller and online businesses with less conventional business models or a history of sales often find it particularly difficult to be approved for loans by traditional lenders (AFP/Getty)

As small businesses struggle to obtain the lending they need to grow, technology firms are increasingly stepping in to fill the gap left by banks. The latest official estimates suggest the difference between what SMEs need and what’s available could be as much as £39bn.

Younger, smaller and online businesses with less conventional business models or a without a history of sales often find it particularly difficult to be approved for loans by traditional lenders, who can have rigid lending criteria.

Online payments provider PayPal is one company that has seized the opportunity by launching PayPal Working Capital. The service lends money to which is secured against the future sales of the SME. PayPal has now provided over £400m to around 22,000 small businesses in the UK and more than doubled its lending in the last year.

Unlike a traditional loan, repayment of the cash advance is flexible. As a business makes sales, PayPal takes a percentage of the money, meaning less risk for customers.

PayPal already provides payments services to many small business customers, and it uses this data to avoid the lengthy application process often associated with a bank loan. There is no external credit check and funding can be approved and issued within minutes, PayPal says. There are no interest charges or late payment fees.

One customer who’s taken advantage of the service is Mel Thomsett, who set up her small business after her son was diagnosed with autism and sensory processing disorder (SPD). The Sensory Smart Store specialises in seamless clothing for people with sensory or sensitivity issues.

Thomsett started the business after finding a pair of seamless socks online that her son, who suffered from a very severe SPD, found comfortable. Her business quickly grew as grateful customers found her products as effective as she had and today the business turns over around £200,000.

“When I first heard about PayPal Working Capital, I thought it was too good to be true. It was easy to apply because we’ve used PayPal since our first payment in 2009 and they have our entire trading history, so the decision was almost instant,” Thomsett says.

Sensory Smart Store’s first cash advance enabled the company to invest in storage, packing and office space, or the “Shedquarters” as Thomsett calls it. The entrepreneur has used further advances to purchase additional lines of stock, which have helped to boost profits.

“PayPal Working Capital has enabled me to make some solid business decisions and get money relatively easily and quickly that is completely tied to the success of the decisions we’re making,” Thomsett says

“If our sales are mildly successful, we pay back PayPal at a steady pace; if they’re wildly successful, we pay back faster.”

Mark Brant, managing director at PayPal UK, says finance providers must do more to help small businesses: “They’re the lynchpin of the British economy. With uncertain times ahead, it’s even more important we innovate and equip small businesses with the tools they need to succeed.”