Are Main Street Businesses Starting to Crack?

Earnings season, as always, offers up data points for Wall Street to parse — net income per share, buybacks and top-line growth.

The companies forging eCommerce ecosystems also give insight, via their reports and Securities and Exchange Commission (SEC) filings, into the state of business financing and how smaller firms are faring.

PayPal’s earnings results this week signal that eCommerce growth has stabilized, where management pointed to mid-single-digit percentage point gains that are better than what had been expected at the beginning of the year.

The businesses themselves that sell on the platform have been navigating the challenges of a volatile macro environment. Interest rates and inflation have been headwinds to operations, and lumpy consumer spending — especially discretionary spending — has been a hallmark of the past several months.

Beyond the fees tied to the payment transactions, PayPal — and firms like Amazon and Shopify — have sought to become one-stop shops for sellers as those merchants seek to expand their own operations. Those efforts include lending, offering up loans and working capital lines that can help underpin that growth.

Boosting Provisions

As to the state of business credit, PayPal acting Chief Financial Officer Gabrielle Rabinovitch said during a call with analysts that the company has boosted its provisions for anticipated credit losses, due in part to expectations of losses in its business loans portfolio.

“Like the broader industry, we’re seeing a normalization of our credit portfolio to pre-COVID delinquency levels across our consumer and PayPal working capital portfolio,” she said. “That said, we have seen some deterioration in our business loans portfolio.”

In response, the company has tightened originations, which signals that loans may be harder to come by for would-be borrowers.

Digging into the company’s latest quarterly filing with the SEC, the data showed that total merchant loans and advances, net of loans sold, was $1.7 billion in the most recent quarter. And the percentage of those loans greater than 90 days outstanding stood at 7.1% in the most recent quarter, up from 2.6% in the year-ago June period. The net charge-off rate was 13.3% versus 3.4% a year ago.

Taking more provisions winds up pinching margins, and investors sent PayPal’s shares down 10% at the market open Thursday (Aug. 3).

Amazon’s earnings results Thursday afternoon may give further insight into how sellers are faring.

Shopify’s SEC filings reveal that allowances for credit losses tied to merchant cash advances and related receivables have been increasing, and that roughly 3.1% of merchant loans at the end of the June period were more than 90 days delinquent, up from 2.6% at the end of 2022.

The tightening comes against a backdrop in which the company expanded its lending program. The opportunity for firms like PayPal, Amazon and others is widening to offer credit to businesses, given the fact that traditional conduits (banks) are tightening their lending programs.

PYMNTS data showed that roughly half of Main Street small- to medium-sized businesses (SMBs) are shopping for credit, and 40% of Main Street SMBs with annual revenues of up to $10 million do not have access to ready financing. Roughly 22% of firms will look to business loans from online lenders; 16% are considering merchant cash advances.

It remains to be seen if the anticipated losses become a reality, or if they are ultimately released. But the delinquency rates signal that for at least some merchants, servicing debt on time may be a bit more onerous a task than had been seen only recently.

We’re headed into the all-important holiday shopping season in just a few months. But there’s already evidence that the summer may be bumpy, given that June’s retail sales report missed expectations as retail sales were up 0.2% from May, missing the consensus of 0.5% gains.

PayPal’s transaction (and revenue growth) may buck those slowing rates, but the business loan performance bears watching.