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 Capital behaves just like a merchant cash advance, but without an MCA’s extremely high APR that ranges 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
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 Advance amount: $10,000 Multiple: 1.1 (Projected) avg monthly card sales: $11,000 % of card sales going toward repayment: 10% Owed balance = Advance amount × Multiple = $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.