Credit card processing giant Square is now offering financial assistance to its merchants through a new division called Square capital. Will it drive growth among small businesses using Square?
All small businesses have one thing in common that can make or break them at any stage in the game -- money.
"Access to capital is important to all small businesses," said Miguel Ayala, press secretary for the Small Business Association (SBA). "Whether it's buying some necessary equipment to expand their operations or invest in some advertising for their products, even a small amount of capital can make a big difference."
Cash is the fuel to get a small business off the ground, and the fuel for an existing company to expand. However, getting to the money isn't always easy, and an unstable economy can make interest rates soar.
In an effort to help businesses circumvent some of the hurdles associated with raising capital, credit card processing company Square launched Square Capital, a program that lends money to small businesses that use Square products. Square Capital launched back in May 2014 and has since extended $75 million to 15,000 merchants.
Square has always been the company that helps businesses accept payments, but now they are providing them capital as well.
After receiving money from Square Capital, a business will pay the principal amount back to Square plus a fixed fee, determined as a certain percentage of that principal amount. The fee is different from an interest rate or APR in that it is a set number that never changes, regardless of how long it takes to pay it back. The typical payback period is estimated at 10 months.
In order to pay the money back, Square collects a fixed percentage of the seller's daily credit card sales, meaning merchants will pay more on busy days and less on slow days. Businesses that receive capital have access to a dashboard that shows the payment progress.
There are no application forms to fill out and the capital can be available to the receiving business within one business day.
Faryl Ury, a product communications manager at Square, has worked on the product from the beginning. She said the idea came from merchants who were using other Square products, like the point-of-sale system.
"One thing we consistently heard from the merchants we worked with was, 'Great, I can accept credit cards, now I want to add a second location or grow from a food truck to a brick and mortar, but I need money to get started and I'm having a lot of trouble,'" Ury said.
Square employees began walking the streets of their neighborhoods and stopping into local businesses that used Square, asking them how they got money for their business or paid for certain tools they used. That was when they began the beta for Square Capital and started inviting businesses into the conversation.
"I just went into their office and they told me about it and then, from there, they wanted us to be kind of a pilot company to try it out before it went public," said Darren Scott of art brand ZeroFriends.
Many of the details for the Square capital program were teased out in meetings like this with beta customers. For example, Scott said Square initially wanted to take 5% of his daily sales toward repayment, but in an effort to pay it back faster he asked for 10% to be taken instead.
Scott said his company used the advance to build out its inventory.
"Our demand is generally higher than what we can produce," Scott said. "So, with every dollar we find we just put it back into inventory to create more products."
In order to determine which companies they should partner with, Ury said Square proactively reached out to businesses based on their history with Square and their payment processing volume. Ury said there are other factors measured by Square, but they are part of the secret sauce.
Four Barrel Coffee was another company that was approached early on to be a part of Square Capital. COO Brian Thomas said, in a way, it's like Square is purchasing future receivables.
"Since they're able to see how much we take, over a given period of time, in credit cards at one of our locations, they're able to front us money that they know we're going to receive over a given period of time," Thomas said.
Every offer is personalized, and Square works with the merchants to determine what amount of capital can be extended to them. The fee is variable as well, but Ury said it averages between 10% and 14% of the principal amount. So, if you were advanced $1000, you could owe Square between $1100 and $1140 on average.
Even though putting it in cash terms makes it easier to understand for some businesses, Thomas said it's not always clear what you're paying for the advance.
"It is difficult to understand how much the money costs you compared to your traditional loan, because there's no fixed interest rate on the money, it's a fee," Thomas said. "Other than that, I would say it's been pretty awesome."
Since the money is automatically subtracted from the processed payments every month, Thomas said that he would caution businesses with tight margins to really run the numbers before jumping in.
Much like its popular credit card payment processing service, Square does not require a credit check for an advance from Square Capital. This is great news for small businesses, but credit history is something that can play an important role in other forms of financing.
"Credit history can be an important consideration when applying for a traditional small business loan, and some non-traditional lending programs don't create the same creditworthiness a traditional bank loan would," Ayala said.
To kickstart the program, Square invested $50 million dollars of its own money, but it also got an investment from Victory Park Capital to further build out the offering. Square Capital is a way for Square to make money, but Ury said it helps strengthen their customer base as well.
"There's a fee associated with Square Capital, so that comes back to Square," Ury said. "But, also, the more important thing is, if our businesses are growing that's a great thing for us."
Businesses can request more information about Square or Square Capital here.