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Summary:

After an initial pilot program, Square is taking the wraps off its new lending program. Square is offering money upfront and deducting repayments directly from merchants’ credit card transactions.

Square on Wednesday confirmed the launch of Capital, a new cash advance program for small businesses that the company has been testing with its merchant customers. In short, Square is offering its customers capital advances so they can grow their businesses, but unlike small business loans, repayments aren’t made at set amounts each month. Instead, Square takes a percentage of every credit card transaction until the advance is paid off.

While Square didn’t spell out the specific financial details of the program, it said the typical advance could be around $10,000. Using that amount as an example, a merchant will pay back Square $11,000, but at no set timetable. Every time that merchant took a credit card payment using Square, an additional 10 percent of the transaction price will go toward paying off that debt, though that percentage rate will vary depending on the size of the advance.

Source: Square

Source: Square

The size of the advance is calculated based on a business’s sales history – which Square has ready access to through processing its card transactions – with the aim of having it paid off within 10 months. If the merchant has a slow year and takes longer to pay, there’s no penalty. Square said the total interest on the loans will range from 10 to 14 percent of the advance, depending on the business and the amount of the advance, but the fee is a set price. In the example above the merchant would keep making payments until $11,000 is collected, regardless of whether it takes six months or two years.

Compared to interest rates on a traditional small business loans, those fees are high, but Square project engineering lead Gokul Rajaram said Square anticipates its merchant customers will be enthusiastic about the program because of its flexibility. There is no long application process or paperwork. The money is deposited in a business’s bank account the next business day. Most importantly, Rajaram said, the repayment schedule is tied directly to a business’s cash flow.

Gokul Rajaram

Gokul Rajaram

“The amount they pay on a daily basis scales with their business,” Rajaram said. If a merchant doesn’t process a single card transaction in a day, it pays nothing. If it has a few stellar weeks, it will pay off the advance that much faster.

Square is obviously getting some healthy returns on its investments, though it does take on risk. Going bankrupt and shuttering one’s doors is an all-too-common occurrence in the small business world. But according to Rajaram, Square gets more out of this program than just fees. The faster a business grows, the more money Square makes.

Ultimately, Square’s business model is built around the idea of making it easier to run a small business by giving it ready access to services like credit card processing and online retailing. Square Capital definitely fits into that mold.

According to a recent Accenture report on branchless banking, a sizable portion of North American consumers is already willing to trust Square to provide all of its financial services. Square isn’t quite at the point of becoming a full-fledged bank to its small business customers. But offering these kind of quasi-loans might be a jumping-off point.

This post was updated at 8:50 AM to add additional details on how Square Capital’s fee structure works.

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  1. You need to adjust your numbers to account for compound interest. There is no way that a merchant will pay back 11k using this model.

    1. Hi Jordan, there is no compounding interest in this case because Square charges a set fee on the advance ranging from 10 percent to 14 percent of the total amount, rather than an annual percentage rate. Sorry, I realize that was a bit confusing in the post so I added a sentence to clarify.

      1. Oh wow, thanks for the clarity. I suppose that was my mistake. I just assumed that there was no way it would be calculated that way.

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