Square Gets into the Loan Business with Square Capital

Payment processor Square may be looking to a time-tested business model for its next revenue stream: business loans. More specifically, small business loans made to customers who use Square to accept credit cards.

The venture, reported on by The Information and Re/code, is called Square Capital. Through this new program, Square has apparently offered small credit lines to some of Square’s payment processing customers that need a short term influx of cash. In one example cited by Re/code, the amount loaned by Square to a small business was $7,300. Square is reportedly taking a 10 percent cut of the company’s credit and debit transactions going forward until the loan plus interest is paid back.

Now here’s where it gets interesting (no pun intended). The total dollar amount that Square charges for interest is apparently figured out ahead of time. Regardless of how quickly the company pays Square back, the amount stays the same. For the example above, Square tacked $1,022 of interest onto the $7,300 loan, and that amount will stay the same whether the company pays Square back in one month or one year. So even if a company’s sales slow down and the money can’t be paid back as quickly, additional interest is not accruing on the loan.

From the outside looking in, Square Capital seems small-business-friendly, though the folks at Re/code seem to view it more as a small business payday loan service. I don’t believe it’s quite as predatory as some of the payday loan companies out there, but 14 percent on a loan that could be paid back fairly quickly (say, in a few weeks) is a pretty sizable chunk of interest. But perhaps that’s how Square plans to make its money, and how it plans to stay ahead even when some companies can’t pay their loans back.

Square has published a press release describing the program in more detail, and has also written a blog post about Square Capital, which can be found here. We’ve also included a video below that Square created for its new product.