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The merchant cash-advance and non-bank small-business loan sectors have boomed in recent years, with startups, established providers, and PayPal Inc. all seeking to tap merchant demand for capital that banks haven’t met. Now comes merchant processor Square Inc. with a new merchant cash-advance (MCA) service called Square Capital.
As it has with its merchant-acquiring operation for the past four years, San Francisco-based Square is emphasizing competitive, transparent pricing. But what stands out about Square Capital is that Square is not taking applications for it. Instead, Square will offer the service to merchants of its choosing.
Square did not respond to a Digital Transactions News inquiry, but said in a post on the merchant support center of its Web site that “you may be eligible for Square Capital if you’re an active Square merchant running your business with Square. You’ll be notified if you’re eligible to enroll within your Square Dashboard.” (The dashboard is a part of the Square Register service that provides online reports to merchants using smart phones or Apple Inc.’s iPad about their Square sales, deposits, and related account matters.) The post later says that “if you’re not currently eligible, Square Capital may become available as you run and grow your business with Square. Eligibility is based on your processing volume and your Square history.”
A veteran of the merchant cash-advance industry believes Square’s approach is unique. “I don’t know of other MCA or small-business companies that do not accept an application,” Barry Davis, senior management consultant at Omaha, Neb.-based The Strawhecker Group and former head of business development at Bethesda, Md.-based MCA provider RapidAdvance, says by email. “The closest I have seen is where a merchant acquirer provided merchant data on its portfolio and allowed a major MCA company to directly market to the merchants that had good characteristics for taking on a MCA or loan.”
With so many of its merchants being young businesses with short financial track records, the big advantage to Square’s strategy is in risk management, according to Davis. At the same time, Square may have to do some educated guessing about whether small businesses will want its cash advances.
“This approach certainly allows Square to ‘cherry pick’ the merchants it wants to serve, however, there is an unknown on whether these targeted merchants will have demand for an MCA,” he says. “This certainly allows Square to control the risk it takes initially and to fine-tune its underwriting model.”
Square said in a Wednesday news release that it has tested the service with “thousands” of merchants who used the funds “to buy equipment and inventory, hire more employees, and add new stores.”
In merchant cash advances, the lender provides cash up front to a small business in exchange for the merchant pledging a portion of its future payment card sales to repay the advance over time. Square Capital will take a percentage of daily card receivables, with Square determining pricing on a case-by-case basis.
Square’s expectation is that the typical advance will be repaid in approximately 10 months. There is no set time frame, however, and repayment amounts will increase or contract in line with sales. In an example presented on its Web site, Square says a merchant that asked for $10,000 would pledge $11,000 in future card sales, which means 10% of daily card sales would go toward repayment. Square says it can deposit an approved merchant’s funding to the bank account linked to its Square account in one business day.
Commenting on the example, Davis says “10% is certainly very competitive for the MCA and alternative loan products that are currently offered. American Express probably has the lowest-cost product on the market, followed by Kabbage, Amazon, and PayPal. My sense is that Square can price more aggressively, especially with the brand awareness it possesses along with its ability to directly target small businesses and avoid the large sales commissions that are being paid to brokers and [independent sales organizations] today by other MCA companies.”
It was not immediately clear if Square is funding the advances itself or working with a bank or specialty lender, as many other MCA providers do.
The introduction of Square Capital comes at a time when Square, headed by Twitter co-founder Jack Dorsey, is sharpening its focus on its core merchant business and stepping back from consumer products. Square recently stopped offering its Square Wallet application in the Apple and Android app markets for mobile devices. The 3-year-old Square Wallet allowed smart-phone users to store their payment data in the app and use them to pay at participating Square merchants without removing the phone from their pocket.
In addition to Square Capital, Square yesterday unveiled Square Feedback, a service that allows consumers to give merchants their opinions about the products and services they bought by using Square-generated digital receipts. Square also launched a feature called “pickup” that enables customers to order items ahead of time from a Square merchant and pick them up at the store or restaurant. To offer pickup, merchants need to use an iPad tablet running Apple’s iOS 6.0 operating system and Square Register. Square is charging merchants its usual 2.75% per-transaction fee as pickup’s promotional price until July 1, when the fee will increase to 8%.
