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Square Capital Business Loan Review

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Business owners who use Square to process customer payments could be eligible for Square Capital, a loan program from the financial services company perhaps best known for its point-of-sale software (POS software).

POS systems allow small business owners to accept credit card payments through smartphones and tablets. Square tracks and analyzes those sales, plus inventory and customer trends. Based on those insights, Square determines which users would be eligible for its financing program.

If you’re interested in securing a business loan through Square Capital, keep reading to determine your eligibility and what funding solution you could receive.

What Square Capital offers

  • Loan amounts between $500 and $250,000 for eligible borrowers
  • Terms up to 18 months
  • Funding as soon as the next business day
  • Fees not disclosed

Borrowing through Square offers convenience for small businesses seeking relatively small amounts. However, it will most likely be more expensive than a traditional business loan, which typically provides larger amounts as well.

As of the date of publishing, Square Capital provides loans between $500 and $250,000 for eligible borrowers through Celtic Bank, a Utah-based bank. Loans must be repaid within 18 months.

Upon approval, Square would deposit funds in your bank account as soon as the next business day. To collect repayment, Square would make automatic deductions from your daily Square transactions. You could pay off your debt early without facing penalty, though there may be little incentive to repay early because of the way Square structures its fees — more on that below.

How much does a Square Capital loan cost?

Square charges a fixed fee on each loan rather than interest, and there are no additional application, prepayment or late fees. Your loan balance, or the total debt you owe, would include your loan amount plus the fixed fee, regardless of whether you prepay.

Square would take a fixed percentage of your daily Square credit card transactions as repayment. Every 60 days, you’d be required to pay at least one-eighteenth of your loan balance. The majority of borrowers cover this minimum amount through their regular volume of Square transactions. However, if you only make the minimum payment, you would pay down only half of your total balance at the end of the 18-month term. You would then owe the full remaining balance and Square may debit your bank account for that amount.

A loan from Square Capital functions like a merchant cash advance, another type of business financing. When a business owner takes on an MCA, the cash advance provider purchases a portion of receivables, such as credit card sales, in exchange for funding. The MCA provider would take a percentage of daily sales rather than a fixed amount until the debt is paid back, which means you would make larger payments on days when sales are high.

MCA providers also charge flat fees instead of interest, like Square. The fee is referred to as a factor rate, which is written as a decimal figure. You would multiply your factor rate by the amount of your MCA to determine the total amount that you would owe.

Square does not disclose its fees upfront. Your repayment rate, which would be the percentage of each sale that Square takes, would be based on aspects such as your loan size, payment processing volume and your business’s history using Square.

Who is eligible for Square Capital financing?

Square’s financing program is invitation-only. Square takes note of business owners’ sales patterns and contacts those who may be eligible for financing. If you fit the profile, Square would send an email through your Square dashboard with a custom loan offer.

However, you would still need to apply to be approved for funding. While there are no credit score requirements, Square would review your credit card processing volume and your overall business health when approving your for a loan. Generally, Square looks for businesses that meet the following criteria:

  • At least $10,000 in annual processed payments.
  • Frequent payment activity.
  • Diversity of new and returning customers.
  • Consistent growth.

The more active you are on Square, the higher your chance of receiving a financing offer. The size of your loan could depend on the rate your business is growing. The more high-speed growth you experience, the larger your loan offer may be.

Who can’t receive financing?

Even if Square identified as you a potential borrower, you could still be declined for financing. Your loan application would go through Square’s underwriting and verification process, after which you would receive an email detailing why you were or were not approved.

Common reasons for being declined include unusual payment processing activity or a recent drop in the number of Square payments you accept. Square may also deny your application if you’ve had too many chargeback claims through your Square POS.

Cash advancing could impact your approval as well. When you swipe your own credit or debit card or cards of family, friends or associates, Square would consider that to be cash advancing, which is a prohibited activity. Additionally, any failed debits on your Square account because of insufficient funds would hinder your loan eligibility; in this situation, you could set up drafts through your own bank account or set up a bank account with Square.

Applying for Square Capital financing doesn’t affect your credit score, so you wouldn’t be negatively impacted if you’re denied a loan. The specific reason for denial would determine when you may be eligible to apply again.

Pros and cons of Square Capital

Consider these benefits and drawbacks of Square Capital when determining if it’s the right funding option for your business.

Pros Cons
  • Convenient for existing Square users.
  • Must receive an invitation to apply, and eligible businesses could still be declined.
  • Loan amount could cover small or large purchases.
  • Loan fees not disclosed upfront, and you may not be approved for the $250,000 maximum.
  • No accumulating interest or prepayment penalties.
  • Payments instantly taken out of daily sales and no reward for prepayment.

 

The fine print

When borrowing through the Square Capital program, you may be subject to additional requirements depending on your loan amount. Here are some details to keep in mind:

Collateral: For loans that exceed $75,000, Square requires borrowers to provide collateral. Square would take a security interest in your business assets and file a UCC-1 statement with the Secretary of State in the state where your business is based. The filing would give Square the rights to your assets until the debt is paid back. After you pay your debt in full, Square would remove the UCC filing.

Fast repayments: Square Capital’s repayment process is similar to that of a merchant cash advance, as mentioned earlier. MCAs are notorious for quick repayment schedules that can eat into a business’s cash flow. Because payments fluctuate and are based on a percentage of daily sales, it could be difficult to predict how much would be deducted each day. Make sure your business is suited to handle this structure before borrowing funds.

The bottom line

For businesses that use the Square POS system to process card payments, Square Capital may be a convenient source of financing. If your business is healthy and you process a substantial number of transactions, Square may take notice and send you an invitation to apply for funding.

But be aware that you may not be approved, even if Square indicates that you are eligible. A number of factors could impact your chances of approval, such as questionable transaction history. Fortunately, Square would inform you of the reason for denial, as well as when you may be able to apply again.

Square does not disclose the cost of financing upfront, and your loan fee could be higher than expected. Payments would be taken directly from your daily sales, which could impact your cash flow. Be sure to shop around to find the right lender offering financing with fees and repayment terms that work for your small business.

 

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