The San Francisco-based mobile payments company which relies primarily on small business clients for its own revenue announced Square Capital on Wednesday, a new cash-advance program for funneling money into small businesses in need of a loan.
Square won’t require small businesses to actually apply for a cash advance. Instead, it will approach companies that use its Square technology to process payments with cash advance offers. Each offer will be unique, says Square’s Product Engineering Lead Gokul Rajaram, and Square will base the proposed capital amount and expected return on each company’s sales data that Square has access to.
Small businesses will pay back the capital bit by bit, giving Square a small percentage of future sales in return. For example, if a business borrows $10,000, they may pay Square $11,000 in future credit card sales. Square usually takes 2.75% of each transaction, but a small business that took a Square cash advance might pay back 10% on top of the 2.75% until their advance is paid off, says Rajaram.
Of course, small business loans can be risky, which is why a lot of companies Square spoke with ahead of the pilot were turned down by big banks who weren’t sold on their business. Rajaram isn’t worried, however. The sales data Square has from its small business users offers a better look at how the company is doing than any application could, he adds.
Unlike a traditional loan, Square’s cash advance has no timetable for repayment, meaning businesses pay more when sales are good, but aren’t handcuffed with payments when things slow down. Square will offer each capital advance under the assumption that funds will be paid back in 10 months, although that isn’t required.
“Square Capital, Square Order, Square Market all of these things are just part of a holistic suite of services we’re building,”
“Square Capital, Square Order, Square Market all of these things are just part of a holistic suite of services we’re building,” says Rajaram. “When we think about what we should work on [or] what we should build, it’s all about [asking], ‘do these services help sellers run and grow their business?’ Square Capital helps them grow their business.”
Square has been piloting this Square Capital since last year, and has already loaned out “tens of millions of dollars” to thousands of different small businesses. Cafe Grumpy in New York used a Square cash advance to open a sixth location in Grand Central Station. Follicle Hair Salon in San Francisco added 12 new salon chairs with its cash advance.
Zero Friends, a clothing company with a shop on Haight Street in San Francisco, has already accepted two cash advances from Square, co-founder Darren Scott told Mashable. The first, which the team took last spring, helped Zero Friends double its inventory for Comic-Con International in San Diego, an important convention for company sales.
Zero Friends was able to pay back its advance (which Scott declined to specify) in roughly six months.
“It’s been great, especially with smaller sums of money that you’re taking out compared to what people are usually going to a bank for,” says Scott, who added he wouldn’t shy away from taking out a third advance in the future. “I like the payback system, I like that there [aren’t] late fees at all.”
