Launched in May, Square Capital Has Advanced $75 Million to 15,000 Square Sellers

Square Inc.’s 6-month-old cash-advance product, Square Capital, has distributed $75 million to some 15,000 small businesses, the San Francisco-based payments company announced via Twitter this week.

Further, merchants that have accepted the advances have processed in excess of $1 billion in sales through Square, the company said. It also pointed to a high satisfaction level with Square Capital, citing a survey in which 85% of businesses taking the advances were “extremely likely” to recommend the product.

“They’ve already worked with Square, so there’s trust out there,” a Square spokesperson tells Digital Transactions News. “It feels very logical for them to get small-business financing from Square.”

Using data derived from transaction processing it performs for merchants, Square determines prime prospects for funding and invites them to apply for a Square Capital advance. Merchants repay the advance by having Square withhold a portion of the card receipts it processes. Since its launch in May, Square Capital has extended funds to businesses throughout the country.

A deal in August with Chicago-based Victory Park Capital has lent fuel to Square Capital’s growth. Victory Park has already funded about $25 million of the cash advanced so far.

One key factor Square considers is the prospect’s potential for growth. “We have a unique, holistic view of the real-time sales data,” says the spokesperson. “If you’re a growing business on Square, we’ll reach out to you.”

Technically, merchant cash advances are not a loan. Instead, they amount to a buy-sell agreement in which merchants receive immediate funding in return for agreeing to give up a slice of credit card sales each day. On its Web-site page for Square Capital, Square gives as an example an advance of $10,000. With 10% of card receipts withheld to repay the advance, the merchant ends up paying back the original advance plus $1,000.

A typical Square Capital advance hovers around $5,000. These are not huge sums, but they can be useful to small merchants and are too small for traditional lenders to bother with. “Often, [merchants] can’t find anyone willing to extend $5,000,” says the Square spokesperson. “It’s not worth it to go through the paperwork for $5,000.”

Also in contrast to traditional lending, which can take weeks to conduct underwriting and make funds available, Square says it can have funds in merchants’ accounts the next business day.

The traditional merchant-cash advance market has been roiled in recent years by competition from companies like Square and PayPal Inc. that process payments and have invested in technology to run analytics on the transaction data they collect. Meanwhile, other new companies like On Deck Capital Inc. and Funding Circle Ltd. have applied a heavy emphasis on technology to make streamlined term loans available online to small businesses. On Deck, for example, claims it can approve a $35,000 loan online in a matter of minutes.

Getting into cash advances may have been a wise move for Square, observers say. The product cements a relationship with a growing merchant, since the merchant can’t leave Square at least until the advance is paid off. Square also benefits from a lower cost of distribution, since it’s dealing with merchants it has already signed up and has collected data on.

“One problem for [the traditional] merchant cash advance has always been distribution,” says Janinne Dall’Orto, an analyst who follows the cash-advance market for First Annapolis Consulting, Annapolis, Md. “For Square, it makes sense. They have a captive audience. They’re sending statements, so they can remind [merchants] constantly of the money available.”

Still, it’s early days for Square Capital. The next $75 million may be a little tougher, Dall’Orto says, especially as Square moves upmarket to larger businesses. “The jury’s still out on whether Square Capital will be successful,” she says. “They’re still in the micro-merchant market. It’s still a new thing for them.”