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Loans of $5,000 to $100,000 will be available by invitation to select Canadian PayPal merchants starting Oct. 21.

Paul Sakuma/The Associated Press

Canadian small-business owners seeking capital will soon have another alternative-financing option, as PayPal Business Loan launches in Canada.

Paul Parisi, president of PayPal Canada, says as business owners face issues securing financing from traditional banks, PayPal saw an opportunity to enter Canada’s growing alternative-lending market.

“The concept of us being able to help our smaller merchants get money fast and cheap and efficiently, with a known cost to them, has proven to be very valuable to our customer base in other parts of the world,” Mr. Parisi says.

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Starting Oct. 21, loans of $5,000 to $100,000 are available by invitation to select Canadian PayPal merchants. Early next year, all PayPal business account holders who have been with PayPal for at least three months can apply for loans. The company’s business loans are already available in five countries.

To get a loan, business owners fill out an online form. As applicants are existing PayPal merchants, Mr. Parisi says the company “knows who they are” and what’s happening in their business, meaning a lending decision is given in minutes. If approved for financing, funds are transferred to the business’s bank account in one to two business days.

The loan is repaid through weekly payments, with the term ranging from 13 to 52 weeks.

While traditional lenders typically charge interest based on an annual rate, PayPal charges borrowers a single, fixed fee that ranges from 6.5 to 19 per cent of the loan amount. PayPal says that fee ranges depending on the risk profile of the applicant, the loan amount and the length of the loan.

Based on loans given during a pilot of the product, the average fee was 15 per cent. PayPal expects that fee to go down as more loans are disbursed.

Michael King, Lansdowne Chair in Finance at the University of Victoria, says it’s a natural extension for companies like PayPal to start offering lending products.

“It’s quite attractive for both sides, because it allows PayPal to offer another service to their customers to make them more loyal and sticky, and for the small business, it gives them a source of financing that otherwise wouldn’t be available,” he says.

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PayPal has “a different window” into businesses than traditional lenders, Mr. King says, meaning small businesses that struggle to access bank financing could be approved by PayPal.

Mr. King expects other payment companies to also move into Canada’s small-business lending space. In the United States, Shopify, Stripe and Square have all recently launched financing products for entrepreneurs.

“Small businesses will benefit from having a greater supply coming from different alternative sources, and particularly from companies where they already have a business relationship,” he says.

“There’s quite a bit of excess demand relative to the amount of loans that are available.”

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