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Thread: PayPal Working Capital

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    Default PayPal Working Capital

    I need a loan of $5,000 to buy inventory. 99% of my sales are processed by PayPal.

    PayPal Working Capital is offering me $5,000 for a one time fee of $245 plus 30% of my sales until the $5,000 is paid off. Time frame is estimated at between 5 and 6 months. This sounds like a good deal to me. No financing to fight about and kinda pay-as-you-go. I don't have to worry about getting buried under payments.

    But, is it to good to be true?

    Thanks again, Tom

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    Quote Originally Posted by ASH2001 View Post
    I need a loan of $5,000 to buy inventory. 99% of my sales are processed by PayPal.

    PayPal Working Capital is offering me $5,000 for a one time fee of $245 plus 30% of my sales until the $5,000 is paid off. Time frame is estimated at between 5 and 6 months. This sounds like a good deal to me. No financing to fight about and kinda pay-as-you-go. I don't have to worry about getting buried under payments.

    But, is it to good to be true?

    Thanks again, Tom
    It's not, PayPal Working Capital is a dream come true.

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    Looks good on the surface. What happens if, for some reason, your sales drop to 0 and payments still need to be made?

    Also, 30% off the top of all sales until the forwarded cash is repaid will eat up most of your profit and ability to save some cash. Like my earlier question, what will you do if you have a big order come through when you're 2/3 of the way through paying this off?

    I'm not knocking the program as there is a time and place for it, and it probably works well for some people. I just want to make sure that you look at this from as many angles as possible and run lots of "what if" scenarios.
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    You are buying inventory with that money, the 30% is just part of your COGS -- if no sales, no 30% payment to make, although I am sure that the deal has some provision to make sure that PayPal does get paid in full at the end of the 6 months (or sometime). The $245 is your interest expense.

    What is your margin on this inventory? Is 30% more or less than your actual COGS? It is only eating in to your "profits" if the 30% of sale is more than your COGS.

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    "Looks good on the surface. What happens if, for some reason, your sales drop to 0 and payments still need to be made?" - In the event that happens I'll have to make some more owner investment.

    30% is close to my profit margin. So until it's paid off I have no profit. That's no big deal for me. This business is a hobby so I don't need to take regular payments as income towards me. I use the credit that paypal gives me now in to form of 0% interest for 6 months and I always pay it off before it's due. I just keep enough of a balance in case someone wants to return a item or some unexpected expense turns up.

    I'm seriously thinking of taking this option. I really don't see many down falls. If my sales drop to nothing for months on end I'm only out $5,000 max on my personal account. Or if I have a slow month my payment will be less and I don't have to worry about making a large payment with light sales. How many loans are tailored to your sales?

    If anyone sees any other down falls please reply.
    Tom

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    If 30% is your profit margin and they want that 30%, I don't see how there's an upside to this deal. Please explain.
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    30% is your profit margin, so then is 70% your cost-of-goods-sold?

    Paying 30% of your sale price to payback the doesn't seem like a bad deal to me -- you'll have 70% of your sale price to cover your other costs and reinvest in new inventory.

    Remember, you've already paid for the inventory you are selling -- with the $5K loan that you would be paying off with the 30% of sales.

    But if you COGS really is 70% of your sale price, you'll need to sell ~$11K+ of inventory to payback the $5K loan...

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    "Paying 30% of your sale price to payback the doesn't seem like a bad deal to me -- you'll have 70% of your sale price to cover your other costs and reinvest in new inventory."

    That's how I'm looking at it. I don't think I explained myself well. I got confused between "gross" and "net" mark-up and profit. My initial mark-up to sales price is well above 30%.

    Tom

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    Example: if I buy something for $50 and sell for $100, that's a 100% markup. But if I have to pay 30% off the top to my lender, my markup is down to 40% (not 70%).

    If my markup is only 50% and I take 30% off the sale, my markup is now down to 5%, which isn't enough to keep the lights on unless you make it up with a HUGE volume increase.

    So, again, depending on your markup, this could be a bad deal unless you're just trying to move product out without much concern over your profit.
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    It sounds to me like some of the answers are thinking of the 30% payback to be the cost of the loan. Of course the interest cost is $ 245.00 to borrow 5 grand. Now that sounds like just under a 5% interest rate which would be quite good except the money will be paid back in 6 months which would be a 10% interest rate. Of course he would not be borrowing the full 5 grand for the 6 months since 1/6 of that would be paid back each month so if you figure the APR it is more like 15% interest which would be good for PayPal but definitely not a cheap loan.

    The $ 5,000 loan would allow him to buy merchandise that he would sell for just over $ 7100.00 if his profit margin is 30% then he would generate about $ 2100 in profit on that amount of product. The key issue to me would be if having that inventory would allow him to increase his sales in that full amount or somewhere close to it. If having the inventory doesn't allow for increasing sales then it may not be such a good deal.

    With the cost to borrow the money being $ 245.00 the most he really has to lose is $ 245.00 which isn't big money. However I am constantly seeing offers similar to this advertised on the radio and internet and it might not hurt to shop around to see if someone has a better offer.
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