The service, which will be available in the autumn, will charge a single fixed fee. Repayments will be levied on new sales made, with no interest or late payment fees.
This unusual model, which means businesses won’t be overburdened if they are hit by falling sales, is similar to UK digital funder Liberis.
Lending decisions will be made partly on the basis of sales data held by Paypal, and funds will be made available within approximately five minutes.
Cameron McLean, Paypal’s UK MD, said: “Small businesses are the lifeblood of the British economy.
“But seven years after the start of the credit crunch, many of them are still struggling to get funding.
“According to the British Government, around a third of SMEs rely on retained earnings or the owners own finances rather than bank or equity funding.
“This means that many find it very difficult to finance their present needs or future growth and the problem is acute for smaller, online businesses.
The move follows the launch of a similar programme by Paypal in the US last year, which had provided $140m in cash advances to SMEs.