Garnet Capital Advisors Blog

June 16, 2014

Square shakes up small business lending with merchant cash advances

One new initiative that is making waves in the credit markets is Square Capital, which lets small businesses secure capital in exchange for a claim on their future revenue stream.

The program is offered by a subsidiary of San Francisco-based online card acceptance firm Square, Inc., and small businesses that want to harness it must use the company's Register application, according to Square tallies the sales volume of firms, and then uses the data to determine which ventures will be the most likely to make good on their payments.  This program is an internet based potential disrupter to the traditional factoring business.

When the San Francisco-based financial services firm identifies eligible companies, it informs them through its web-based Square dashboard, which merchants use to track customer payments, the media outlet reported. Square also extends these offers through email.

Borrowing costs
Companies usually pay total fees worth between 10 and 14 percent of their advance, according to Daily News. On a $5,000 balance, a borrower would likely pay between $500 and $700. However, it is worth noting that companies could incur substantial annual percentage rates if they pay this debt off very quickly.

These merchant cash advances are not technically loans, the media outlet reported. Ami Kassar, the founder of MultiFunding, which helps educate small business owners on different credit options, spoke to this situation, the media outlet reported. Small businesses that get $10,000 from Square and pay it back in a year will have an APR of 20 percent, while those that repay the debt in six months will pay an APR of 40 percent.

Lack of deadlines
Another key feature of the merchant cash advances provided by Square is a lack of deadlines, according to

Although there is no specific time frame for making good on the balance, many expect that borrowers will pay it back within 10 months, according to Daily News.

While this type of lending may seem confusing at first, many have advocated for it. Gokul Rajaram, Square's head of product, commented on the situation, reported.
"We feel that what Square Capital is doing for access to capital is analogous to what Square did four years ago for card processing," he told the news source. "Card acceptance four years ago was equally not transparent, slow, bureaucratic, and not flexible."

To provide a strong example, Rajaram pointed to Caroline Bell, owner of Café Grumpy, according to the news source. She told the media outlet that she previously spent months trying to get a traditional loan, but ended up turning to Square Capital to get the money needed to open her sixth location.

Jack Dorsey, who founded Square and also co-founded Twitter, told the Daily News about the key need his company fills for many smaller ventures.
"The biggest blocker to any business is access to capital," he told the media outlet.