Square Begins Offering Data Driven Cash Advances To Small Businesses

Today, payment processing company Square is announcing its first big additional vertical based on its enormous amount of business data. That offering is called Square Capital, and it enables the company to offer cash advances to businesses in its network.

Square Capital has been being piloted for several months, in which Square says it has issued ‘tens of millions’ in cash advances to ‘thousands of merchants’.

The program is interesting in several aspects, all deriving from the fact that this will be (for now) exclusively for merchants ‘running their business on Square’. This is a proactive service that Square will be offering, reaching out to businesses it feels could utilize a chunk of cash to expand or energize their product in some way â€" and are capable of paying it back.

The way it was described to me, Square will utilize its data on a merchant to determine exactly how much cash to offer them, what the fees might be and what the payback percentage will be. Then it will offer a cash advance of, say $10,000 (as an example), to be paid back to the tune of $11,000 out of the merchants sales processed through Square.

The period is described as ‘roughly’ 10 months, though Square says that this could vary, and I was given an example of a cut of around 10% of sales that would be taken, seamlessly, out of the businesses credit card transactions. And that figure will never change, no matter how long it takes to pay back the amount.

Because Square already has the data on the merchant’s business, it can offer these loans with an extremely high degree of confidence. Which it will need as there is no paperwork, no application and no approval process beyond Square’s initial vetting. The money can be in the customer’s hands as soon as the next business day.

If you’re unfamiliar with the process and monetary factors around business loans, this might not sound like a huge deal. But, if it works as advertised, Square Capital turns the whole process upside down with simplicity.

As a small business owner; instead of six months, a ton of paperwork and lost productivity, you’re looking at Square coming to you directly and having the cash in hand nearly instantly. The percentage is taken out of your sales, so the amount goes up and down with your sales, not forcing you to pay a flat amount regardless of whether you had a bad month or not. And fees appear to be 1/8 to 1/10th of what you’d pay a typical loan organization to get your hands on cash.

“It was much easier to get than a traditional loan,” saud Darren Scott of art clothier Zero Friends in an email to TechCrunch. “Everything was straightforward and easy to understand. Also it was hassle free when it came to paying back the advance…every day a small percentage of our credit card sales were taken out of our account to pay back the advance. We barely noticed it was even happening.” 

Zero Friends has taken two advances in the pilot program, and used the first to order double their inventory to take to a convention â€" and sold it all out, effectively doubling their revenue from the show. Their second was used to prototype new clothing lines.

“It was fast (1-2 days turn around) and convenient â€" didn’t require paperwork [or] meetings,” says Cafe Grumpy’s Caroline Bell.

But the critical component of this new business for Square is what many consider to be its unheralded power: data.

Square is privy to an immense amount of data from its customers including money coming in and out, running real-time analytics, seasonality and a lot more data points. This data gives Square a massive amount of certainty about what the right offer will be for any individual business.

This real-time data, says Square, even allows it to update cash advance offers on the fly if the business will support it or an initial offering wasn’t needed at the time.

Then there are the cyclical benefits of Square offering cash injections to merchants who will, hopefully, then expand or increase sales â€" processing more payments via Square’s payment platform. It may not be the primary index of success for Square Capital, but it can’t hurt.

As Square spokespeople and investors are always keen to remind us, the company has not publicly filed for an IPO. But that has not stopped continued speculation about when it might, and whether the overall tech IPO environment has become inhospitable.

Another major profit center, especially one that moves up the scale in terms of raw capital, will be a boon to any IPO hopes that Square might have in the future. If, of course, it has any significant uptake.

Regardless, as a grunt who spent over a decade in retail, I am vividly aware of how easier access to cash could very substantially change the fortunes of many small businesses. Especially ones whose profiles don’t remotely fit the mold which would make them ideal candidates for a traditional loan or cash advance vendor like a bank.

Companies like Swipely, Lending Club and others already trying to make access to cash a non-issue for small businesses, so Square isn’t alone, or first, in the space.

Still, there is huge opportunity to be had here for Square, which can afford to be blind to the physical products being sold because it has the unfiltered feed of growth data flowing in. And there is as big an opportunity for businesses â€" those that use Square anyway â€" to have easy access to capital that they wouldn’t have otherwise, or that would have cost them a lot more.

Top Image: Cafe Grumpy. Lower image: Chloe Rice