Sellers currently using or considering using Square Capital may not know that Square offers more than just credit card processing. They’ve entered the business lending game, offering loans through an invite-only program for sellers with a healthy business history with Square.
“It’s a painless way of getting funds,” says Bernadette L. Harris, owner of By The Book Accounting, who got her first Square Capital loan in March of this year.
But is a loan from Square a good option for your business? Here’s what two Square Capital users experienced, plus details on what to expect from a Square loan.
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An Untraditional Approach
Lauren Fairbanks, owner of Computer Repair Doctor, was looking for business financing when the Square Capital offer arrived in her inbox. As a young business with little business credit history, Computer Repair Doctor was having trouble qualifying for traditional bank financing.
“We were getting turned down by a lot of major banks. The offers we were getting were for rates and APRs that were astronomical,” she said. But Computer Repair Doctor did qualify for Square’s loans. “Square wasn’t as competitive as the rates for a large bank loan but still competitive enough to make it worthwhile.”
Fairbanks also appreciated the payback structure of her Square loan. “You’re not making a large monthly loan payment, you actually don’t even really have to think about it,” she said. “Square takes a percentage of each transaction and everything else is deposited into your bank account.”
Computer Repair Doctor used Square Capital for all three of their store locations. When they were offered sequential loans, the factor rate would drop.
Although the rates remained above that of bank financing, “it was really useful at a time when we didn’t have access to traditional financing. Now that we have a more established credit history, we have access to bank loans,” says Fairbanks.
More Freedom, Less Worry
Bernadette L. Harris of By the Book Accounting was not in the market for financing when Square reached out via email. The offer came during tax season when business was booming, but she decided to take on the loan anyway.
“They sent me the email in March. I went into my account and answered a few questions, and two days later the money was in my account.”
Harris echoes Fairbanks when it comes to the convenience of having loan payments deducted from each sale: “If I have a slow month, I don’t have to worry about being able to make my loan payments.”
It’s a huge relief after a bad experience with a fixed daily payment loan from CAN Capital that debited her account every day regardless of her sales.
“[The CAN Capital loan] was hitting my checking account every single day,” says Harris. For a seasonal business like an accounting firm, a slow season would mean worrying about making sure there was enough money in the bank every single day to make the loan payment. “With the Square loan, if I have a slow summer or just want to take time off, I don’t have to worry about the pressure of making a payment.”
Square Capital: How Do I Qualify?
There’s no way to apply for a Square loan. Square reaches out to customers who meet certain seller requirements, and will consider these factors before extending a seller an invite:
- Processing history with Square. Are your sales trending upward?
- Activity. How often and how many payments do you receive?
- Customer mix. Do you have new and returning customers?
Square Capital Loan Details
|$500 – $100,000
|Fee as a percentage of loan amount
|Roughly between 10% to 16% of the loan amount
|Daily payback (percentage of your sales).
You have up to 18 months to repay
|Can I prepay for a discount?
|No, the cost of the loan is fixed even if you pay back early
Here’s a sample loan offer from Square:
- Loan amount: $6,000
- Total payback amount: $6,990
- Total fee amount: $990
- Payback options: 11% or 13% of sales
- Factor rate: 1.165
The annual percentage rate (APR) on the loan example above will depend on how long it takes the merchant to pay back the loan. A $6,000 term loan with comparable total cost and an 18-month payback would have an APR around 20%.
Is Square Capital Right for You?
For Square merchants who are invited to take a loan with Square, determining whether this is a good option for you will depend on your business needs.
If you need a small loan and you need the funds fast to take advantage of an opportunity, Square Capital could be a good option. After you accept, the funds can be in your account in a couple of days. You’ll enjoy the convenience of having cash in the bank and, if your sales fluctuate, you won’t have to worry about making a minimum daily payment.
If you are an established business with credit history, you may want to consider looking into what your bank or another bank may offer. A bank or SBA loan will likely offer you a lower total cost. These loans are generally larger than what Square offers and take much longer to get, so it’s best to plan ahead.
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This article was originally written on September 22, 2017 and updated on December 29, 2021.
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