Square on Wednesday confirmed the launch of Capital, a new cash advance program for small businesses that Square 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 10 percent 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 would be around $10,000. A merchant would pay back Square $11,000 but at no set timetable. Every time the merchant took a credit card payment using Square, though, and additional 10 percent of the transaction price would go to paying off that debt.
Source: Square
The size of the advance is calculated based on a business's sales history – which Square has ready access to given its processing its card transactions – with the aim of having it paid off in a 10-month time frame. If the merchant has a slow year and takes longer to pay then there's no penalty. Square said the total interest on the loans would range from 10 to 14 percent of the advance depending on the business.
Compared to interest rates on a traditional small business loans, those fees are high, but Square Project Engineering Lead Gokul Rajaram said Square anticipates a lot of enthusiasm for the program from its merchant customers 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. But most importantly, Rajaram said, the repayment schedule is tied directly to a business's cash flow.
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 then they pay nothing. If they have a few stellar week, then they'll pay off the advance that much faster, he said.
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-to-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 them 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, there's already a sizable portion of North American consumers willing to trust Square to provide all of their 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.