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Why Lenders Might Say No If Your Business Runs on PayPal Statements

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

You’ve created a business plan, done your research, and are ready to start shopping for loans to grow your business. But if your only financial statements come from your PayPal account, you might find that you don’t have what you need in order to get a lender’s attention. Financial lenders usually don’t like relying on PayPal statements to verify your company’s cash flow—and the reasons why are pretty understandable when you learn more about PayPal, its history, and its current practices.

Let’s take a look!

What Are PayPal Statements?

Like a bank, PayPal generates monthly statements, usually by the 10th of the month. If you have a business PayPal account, you can check your statements out under the Reports tab. Statements are in PDF format and show the available beginning and ending balances, as well as withheld amounts for the start and end of the month.

One of the limitations of PayPal statements relates to how most people use their PayPal accounts: if you regularly transfer payments out of your account as soon as they’re received, your statements will probably reflect zeros all across the board.

More information becomes available if you generate reports using the Financial Summaries tools. These can show information like your monthly or annual financial summary, monthly sales, inventory, profit, and loss. While this data can be quite detailed, many lenders feel uncomfortable with PayPal because of the ways it differs from a traditional bank.

The Difference Between PayPal and a Traditional Bank

While PayPal might fulfill a lot of the same roles as a traditional bank—sending and receiving money, online bill payment, even offering a debit card—PayPal is not a bank. This is a position supported by PayPal’s management itself, in fact! During last year’s Code/Mobile conference in California, PayPal’s Head of Product and Engineering, Bill Ready, told the audience that “We think of ourselves much more as a technology enabler that can give people access to financial services, and not necessarily a provider of those services.”

Unlike banks, PayPal isn’t FDIC insured. FDIC insurance covers accounts like checking and savings accounts, business and personal money market deposit accounts, CDs, and instruments like checks, money orders, and other financial tools that get issued by a bank. Each account type and depositor is covered up to $250,000. This insurance assures that, if a bank goes out of business, you don’t lose your money. Instead, either your money goes into a new and solvent bank or you get a refund of your balance.

Without FDIC insurance, PayPal can’t offer that kind of protection. In fact, any funds that you keep in a PayPal account are considered, under their user agreement, an unsecured business loan. If PayPal becomes insolvent—unlikely, but always possible—you have no way to recover that lost cash.

Many long-time PayPal customers feel surprised when they learn that PayPal doesn’t offer FDIC insurance coverage… And that’s because it wasn’t always the case.

As of 2002, PayPal kept client money in FDIC-insured bank accounts—and the protection that those accounts had got passed along to consumers. However, newer financial oversight laws passed in California, where PayPal has its headquarters, state that, since PayPal does not keep client funds on its balance sheets, they’re not eligible to be FDIC insured.

Plus, funds in a PayPal account are vulnerable for other reasons. In disputed transactions, many sellers find that PayPal tends to take the side of the buyer and return the money to them. PayPal is currently the defendant in a class-action lawsuit claiming that the payment company has unfairly taken money back from sellers.

Between the lack of federal oversight and policies that limit a business’s security, it’s understandable why some lenders aren’t comfortable dealing with PayPal.

Do Any Lenders Work with PayPal?

While most banks don’t like to work with the online payment company, there is one lender—Kabbage—who does accept PayPal statements.

Kabbage lets you link to many services—like PayPal, Etsy, and Amazon—in order to judge the financial health of your business. The non-traditional lender then uses this information to verify and approve a loan or line of credit within minutes, and funds can be deposited into your bank… Or your PayPal account.

What Else Can You Use For Income Verification?

Even if they work a lot with PayPal, most small businesses can show other proof of income when seeking a loan. Here are some acceptable financial documents you can use to prove income when you’re applying for a loan:

  • Statements from a bank account. Both personal and business bank accounts can show that you have enough cash reserves and cash flow to pay back that loan.
  • Accounts payable and accounts receivable statements. You’ll often have to open up your accounting books to show what money comes in and what’s going out of your business. Keep high-quality records that accurately reflect your business’s cash flow.
  • Balance sheets. These statements detail your company’s assets and liabilities at a specific point in time.
  • Collateral. Collateral isn’t necessary for every loan. However, if you are securing a loan with collateral like a home, a vehicle, a bank account, or another asset, you’ll need documentation of the asset’s value.

Despite the fact that most lenders won’t recognize PayPal statements, there are a number of options available to small business owners. By keeping good records of your company income and expenses and showing valid documentation to back these up, you can prove that you’re worth the credit—and get the funding you need.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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