Earlier this week the mobile payments company Square announced a new cash-advance program for its customers, Square Capital. Square makes it possible for small business owners to easily and inexpensively process credit cards. You may even have a friend or two that use the service to personally accept credit cards.
Square is going to approach customers that use the Square technology to process credit card payments with cash advance offers. It seems like a great fit when you consider how many small business, like those serviced by Square, are turned down by more traditional small business lenders.
Kurt Wagner, reporting for Mashable, writes, “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 (Gokul Rajaram, Square’s Product Engineering Lead).”
Of course we’re talking about two different transactions here. Like every other credit card processor, Square charges merchants to process their credit card transactions—the 2.75 percent. In my opinion, paying 10 percent for a cash advance seems very reasonable.
Lending to the smallest small business owners carries a greater risk than lending to larger, more established companies, but Square is in a unique position to have insight into who might be their best customers and offer this type of financing to those they feel are best suited to an offer. I’m a big fan of this type of innovative thinking. The smallest small businesses, those who are most likely to be Square customers in the first place, have the hardest time accessing capital to grow and operate. It looks like the folks at Square are going to help their customers, by making the process a little easier and what I think is a reasonable cost for this type of financing.
Square is a great example of the entrepreneurial thinking that should have a positive impact in small business lending and for the smallest small business owners. It’s also a great way to find new customers for Square.
There’s no question, it feels like we’re turning a corner and the situation for small business is getting better. It also appears that in addition to the non-bank, alternative lenders that are entering the small business lending space in droves, traditional banks are more willing to jump back into the mix. Wells Fargo’s pledge to make $100 billion in small business loans in the next couple of years is a good example.
Small business grows on borrowed capital. This type of innovation is what the economy needs to help spur job growth and strengthen local small business communities.