how are the funds held and how do I refund the backers if the project doesn't reach it's goal?
Answer: When user make donation it will deduct from user account and setup for project creator account under Incoming funds. This fund available for withdrawn if goal reach to goal else it will consider as failed project and money return to donor.
You can see example video how wallet work here :grouponclone.com/fundraising.wmv
Do the funds go straight to the project creators PayPal account?
Answer: No. it will not go to project creator account straightway. Project creator will request to admin for withdrawn money and admin will proceed withdrawn manually. You can see same example in video.
If so when they request to withdraw funds what difference does it make if we approve it or not?
== When you will get request for withdrawn money. You will pay him using his payment detail and click on approve. User get conformation about money is sent to his payment detail and approved from admin. For example, I am user and my username is Sparkdeal. I will request for withdrawn money for $10 and request to pay me on my PayPal account(User can request for money only in if balance available for withdrawn) Admin will get withdraw request of $10 from sparkdeal. Admin will pay $10 from paypal to his account and click on confirm and user get notification about this payment.
If the funds are in their PayPal can't they just log into their PayPal account and withdraw the funds?
= Yes that concern also in our mind that's why we are using permission/withdrawn approval feature. User get payment only after admin approval. it will reduce 99% fraud.
I can add funds to a user but I've tried to deduct funds and I get an error every time no matter how much or little I try to deduct. If the available balance is $1,000 and I try to deduct $1.00 it tells me that "You can not deduct an amount greater than $1,000.
= In software setting , There is one setting called Min money required for withdrawn. If you have 100 user and all are requesting for $1 withdrawn request. it is not reliable. Min $10 or any amount you can setup in it User can withdraw money if it will match to min withdrawn criteria