# What does Square Capital Mean for Small Businesses?

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Today, Square announced their own small business financing product, Square Capital. And we believe that it’s a great addition to the world of small business financing.

Square allows anyone to turn an iPhone or iPad into a credit card POS (Point-of-Sales) register.

Square Capital behaves just like a merchant cash advance, but without an MCA’s extremely high APR that ranges from 70-250%.

For an MCA, some amount of cash is advanced to you, and you agree to return a higher amount in the future. The amount you pay back is typically 25-50% more than your advance amount (a multiple of 1.25 – 1.5X). Unlike a traditional loan, you don’t have regularly scheduled payments. Instead, a percentage of your future debit/credit card sales (e.g. – 10%) go to the provider of the advance until you’ve paid back what you owe. For MCAs, the typical pay back time is 3-9 months, resulting in APRs ranging from 70-250%.

According to TechCrunch, a typical Square Capital advance consists of a 1.1x multiple, 10% of card sales, and results in a payback period of roughly 10 months

For advances, there is no set payback period, which allows for more flexibility in paying back what you owe. If your business does extra well, you might end up paying back the advance sooner; if your business is doing less well, it may take longer. The 10 month figure just gives an idea of how long it typically takes merchants to pay Square back.

Let’s say a merchant takes up a \$10,000 advance. With a 1.1x multiple, their pay back amount will be \$11,000. If the merchant’s monthly card sales are consistently \$11,000, then 10% of each month’s card sales would be \$1,100. So to pay back the \$11,000 that they owe, it would take the merchant 10 months to pay Square back. Using the MCA APR calculator below, the overall APR would be 23.49%.

``````Math explained

Multiple: 1.1
(Projected) avg monthly card sales: \$11,000
% of card sales going toward repayment: 10%

Owed balance
= \$10,000 × 1.1
= \$11,000

Average monthly payments
= Avg monthly card sales × % of card sales going toward repayment
= \$11,000 × 10%
= \$1,100

Estimated time to pay
= Owed balance / Monthly payment
= \$11,000 / \$1,100
= 10 months
``````

23.49% is a disruptively low APR compared to a typical advance from CAN Capital or even OnDeck and is actually more comparable to the lower APR of a shorter term LendingClub small business loan.

We believe Square Capital is able to offer a disruptive APR because they don’t have to pay excessive commissions to brokers in order to acquire customers. Since Square already knows a lot about each of their merchants, they can selectively offer advances directly to merchants who have a low risk profile. Their offering is very similar to Amazon Lending for Amazon sellers — just swap in brick-and-mortar stores using Square as their POS system in place of Amazon sellers.

Like with Amazon Lending, Square Capital is currently invitation only (to existing Square merchants). It’s a great loan product for small business owners. If you use Square’s POS system, could make good use of extra cash, and get an invitation, Nav would highly recommend considering an advance from Square Capital.

**Update 5/11/2015**: Square has since adjusted their fees higher. According to Square Capital’s current homepage, they seem to change the pricing to 1.13X amount with 13% revenue share. If we assume a merchant can only borrow one month of revenue (which is the case for PayPal Working Capital and Amazon Lending), this will give an APR of 34.81%. It’s higher but it’s still at the lower end of a typical short term working capital loan.