The recent bright star in the portfolio of Square, the San Francisco payments company led by Twitter co-founder Jack Dorseyc, isn’t actually payments. It’s the company’s cash advance service, Square Capital, which provides cash advances to merchants using Square’s point of sale service.
On Thursday, Square revealed that it is deepening its footprint in the financial stack by becoming a traditional online lender.
The move also puts it in competition with other small business lenders such as OnDeck Capital.
In the past, Square (SQ) has insisted that it isn’t a lender, and that its existing cash advances are intended 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.
Cash advances are a speedy source of additional funds, but they come with pricey fees that help insulate the lender from the additional risk to make them. They’re also not as heavily regulated as traditional loans.
Square’s new loans are aimed at small businesses that already use its point of sale services. Square says it will take into account company sales data and cash flow, among other information, to determine if a business qualifies for a loans and what the resulting fee structure may look like. The approach is similar to how Square evaluates whether to issue a cash advance.
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Fees for the new loans range between 10% to 16% of the amount borrowed. Square will pocket 10% of each transaction. Unlike its cash advances, which are typically repaid in a year’s time, the new loans must be repaid within 18 months.
Square will likely receive its money sooner than that. Cash advance customers typically repay them in nine months, it says.
To back the loans, Square is using its own money as well as funds from Utah’s Celtic Bank. The loans will then be sold to investors such as hedge funds.
Square Capital has been one of the company’s fastest growing businesses, as it revealed during its earnings call in March. The company said that it made $400 million in cash advances in 2015—$150 million in the fourth quarter alone—and 70,000 advances to date.