The company that made credit card payments accessible to anyone with something to sell and a mobile phone is getting into the lending game
Mobile payment company square has launched Square Capital, a program for small businesses to get credit, becoming part of a growing trend to lend to small businesses. Square, known as Twitter chairman Jack Dorsey’s mobile payments venture, said in a May 28 press release that the credit program streamlines the process for small businesses to borrow money. There isn’t an application process, and businesses can receive funds as early as the next business day.
Instead of paying an advance upfront, businesses can complete paying it off in about 10 months. Businesses also automatically pay Square a set percentage of daily card sales.
Square did a pilot program of Square Capital, which both the company and sellers reported to be successful.
"We're really grateful for Square Capital, which helped us add a sixth coffee shop location and expand our Roastery," Caroline Bell, owner of Cafe Grumpy in New York, said in the press release. "We got our money quickly and the ease of automatic payments allowed us to focus our time and energy on serving great coffee to our customers.”
Square Capital isn’t the first of its kind: PayPal launched a similar program called Working Capital in fall 2013. Other online business lenders have recently emerged, such as Fundbox, OnDeck, and Kabbage.
This type of lending for small businesses makes it more convenient for owners, says Rohit Arora, co-founder of Biz2Credit, an online market place for small business lending.
“It’s easy,” he says. “You don’t have to go to your bank.”
But, Square Capital’s business model isn’t perfect for the company or small businesses. By taking a certain percentage from card transactions, Arora says business owners have to pay more when sales are strong. The program's business model also makes it harder for small businesses to borrow on non-credit card transactions, he adds.
Small businesses' long-term success is vital for Square, but investing in them is far from a sure thing – about half of all new businesses survive five years or more and about one-third survive 10 years or more, according to the US Small Business Administration. In 2008, at the peak of the Great Recession, the number of businesses with employees closing peaked to nearly 510,000, while there were about 408,000 businesses starting that year. However, business closures in 2011 decreased to 470,000, while the number of new businesses stayed stagnant.
As the economy recovers, lenders like Square and its program want to help jumpstart new businesses' success. Square Capital's price-driven model means they receive a lot more money from small businesses when they sell out or expand, Arora says. The downside to this is that if a customer defaults and the businesses shuts down, then the lender loses both the money and the client.
"You've then lost money on both sides of the equation," Arora adds.