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If a small business owner is unable to get a loan or some quick cash for whatever reason, another option is to turn to merchant cash advances. And Square, creator of the plastic credit card reader and online marketplace, is now entering this market.
Square is testing a program called Square Capital. So far only a few select merchants have been invited to participate. Invitation seems to be based on the amount of transactions each merchant is currently processing through Square.
The move follows similar programs offered by other providers including PayPal Working Capital and American Express Merchant Financing.
One merchant invited to participate in Square’s testing phase, Extreme John, shared the full details of the program in a recent blog post.
At present, the pilot program seems to have three tiers, with merchants paying 4 percent, 7 percent or 10 percent out of each future sale. Payments would continue to be deducted until the initial advance and a one-time cost is paid back.
For example, currently the program offers:
- a $3,200 advance with a one-time cost of $384 at 4 percent,
- a $5,600 advance with a one-time cost of $672 at 7 percent, and
- an $8,100 advance with a one-time cost of $972 at 10 percent.
In its email to perspective participants, Square stresses the advances are not loans and have no interest. The company says the added one time cost does not increase, no matter how long it might take to pay the advance down.
However, Re/code has called the program controversial. The sites says Square Capital is a “financial product” that operates outside the usual regulatory limits of conventional loans. Still, the program does not seem that different from similar merchant advances offered by PayPal and American Express.
In the case of PayPal, merchants averaging $100,000 in annual sales can receive an advance of up to $8,000 choosing a repayment plan of 10, 12, 15, 20 or 30 percent.
Selecting a higher percentage of repayment per sale will get you a lower one-time cost for the advance. So for example, a 10 percent repayment plan would include a $947 one-time fee. However, a 30 percent repayment plan would include only a $281 fee.
PayPal does call its service a “loan” in some of its online information. But one participant we’ve heard from says there is no penalty for longer repayment based on slow sales. PayPal would only change terms or demand immediate payment if the company observed a deliberate attempt to avoid repayment, this participant says. This might include no longer accepting PayPal payments or deliberately directing customers away from the PayPal option.
American Express offers monthly or annual lump sum disbursements in its program. Amounts available and regular fixed repayment fees are based on historical credit and debit receivables, the company’s website says.
Image: Square
Sean Murray
It would be wise not to call it an “advance loan” since their product is not a loan at all. Square Capital is in the business of purchasing blocks of future revenues. Calling it a loan only serves to confuse people.
This is an interesting model. Could work pretty well in certain situations. However, I wish that more traditional financing weren’t becoming so hard to get.
Aira Bongco
I guess this is still up for testing. We still don’t know if it will work. But since Square is already working in the same field. We can confidently expect good things to come out of this.