Square, the Silicon Valley payments company, is expanding its program that offers cash advances to small businesses using its payments app. The company announced on Tuesday that Square Capital has received additional funds from previous backer, Chicago-based Victory Park Capital (which tripled its original investments) and new investor Colchis Capital for its lending business.
Cash advances differ from a loan because they are generally for merchants who need money fast and may not qualify for a loan. Merchants receive a lump-sum payment in exchange for an agreed-upon percentage of future sales, as well as a fee. While cash advances can be a quick way to get extra cash, this particular financial product can also be expensive. Fees tend to be higher because the lender is taking on additional risk. Additionally, cash advances are not regulated as heavily as traditional loans.
Square, co-founded by Jack Dorsey, claims that its capital arm is growing at a fast clip. It has advanced more than $100 million to more than 20,000 businesses over the past year. In April, Square Capital advanced nearly $25 million in capital.
Square Capital offers cash advances to businesses that are using its credit card payments app who need cash fast, and don’t want to apply for a loan from a bank. Similar the way banks decide whether to issue a loan, Square will take into account company sales data and cash flow, among other information to determine if a business qualifies for a Square Capital advance (and what its fee structure should look like).
After Square lends the money, it recoups the money as part of a merchant’s future sales using Square point of sale app, Register. For example, Square may offer a business a $10,000 advance plus another $1,000 in fees, or 10% of the advance. The business will then have to pay back $11,000 and this money will automatically (and gradually) come out of future credit and debit card daily sales using Square over a fixed time. Square says it will take more money out of a merchant’s’ sales if business is doing well, and will take less if business is suffering.
Square says that 80% of merchants who have completed their first Square Capital advance have applied for a second cash advance.
Square burst onto the scene in 2009 when Dorsey, who co-founded Twitter, introduced a sleek white credit-card reader that plugged into a mobile phone, allowing anyone to accept credit card payments. It attracted nearly $600 million in venture capital and has grown to process as much as $100 million dollars in transactions per day for merchants. But it has also stumbled.
Parts of Square’s high-profile deal with Starbucks (SBUX) recently ended—for about two years, the coffee purveyor accepted mobile payments using Square Wallet, a way for consumers to pay merchants using an app on their phone. Square discontinued this consumer-facing mobile payments app but continues to process payments for the retailer.
Square Capital is part of the company’s renewed efforts to focus on providing financial and payments services to small businesses. Square also offers peer to peer payments, disputed purchases protection, analytics, and instant deposits for merchants using its Register app.
“Ultimately, Square Capital is a revenue generating tool for Square,” says Sucharita Mulpuru, analyst at Forrester Research. “And small businesses are Square’s bread and butter.”
Square isn’t the only company focused on offering cash adances to small businesses. PayPal and Kabbage offer similar services.