Square’s Small Business Lending – Innovative?

square_capital_lending_to_small_businessA friend sent me a link this morning to an article about Square Capital’s small business cash advance business. The credit card processing company Square claims to use credit card receipts data to prompt it to advance money – within as quickly as 24 hours from the request – to existing small business customers, even before they ask.

My first reaction, of course, is that we should beware banks bearing gifts of “easy, fast” money. That’s the style of pay-day lenders and its never a good thing. I have received more than my fair share of business credit card solicitations in the mail, with high interest and hidden fees, to remain skeptical of this kind of innovation.

On the other hand, Square Capital’s money seemingly comes with

1. A 10% fixed fee (high, but a reasonable annual rate when it comes to small businesses);

2. Flexible payment terms. Merchants are expected to pay on their own time frame, out of ongoing credit card receivables;

3. No paperwork or waiting, which is pretty rare in the small business lending space.

For a certain type of high-growth small business customer, I can imagine the appeal of the Square Capital offer.

Although the article in Wired emphasizes the innovative aspect of Square’s use of Big Data to identify potential customers for their cash advance, the core of what they’re doing is really a version of “factoring,” the oldest type of commercial lending in the world. Instead of purchasing future receivables at a discount, Square will simply ‘factor’ the receivables by charging an extra 10% fee on top of the amount of repayment. While traditional factoring, or nouveau factoring like Square Capital isn’t particularly new, it can fill business’ need for fast money at a time of high growth.

Small businesses without deep pockets often have few choices about where to raise capital.

There’s the most expensive way: Selling equity to friends and relatives.

Then there’s the next most expensive way: High-interest credit card debt.

And then there’s the least expensive, but slow way: Apply for, and receive, a traditional bank loan.  This rarely works.

I have claimed in the past (and still basically believe) that, despite their rhetoric, the vast majority of banks are not in the small business lending business at all.  Banks would prefer to lend against real estate or cars because both types of loans can be offloaded from their balance sheet through securitization. All other types of loans have been effectively replaced by personal or business credit cards.

To the extent Square Capital can update an old lending model – factoring – with a new data-rich approach to get small businesses money quickly, the innovation sounds worth knowing about.


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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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