Square's Controversial Cash Advance Program Is Funding 10,000 Merchants

Square CapitalYouTubeZero Friends is one of the merchants that is taking advantage of Square Capital.

Payments startup Square has been piloting a new program called Capital, which fronts small businesses a sum of money and lets them pay it back once they start making money.

Square spokesperson Faryl Ury told Business Insider that 10,000 merchants have tapped into the program since it was first announced in March.

Here’s how it works: Square will provide its select merchants with set amount of money, and that money will then be repaid (and then some) by Square taking a cut of the merchants’ daily sales.

However, as Re/Code’s Jason Del Rey points out, Square’s new program is effectively “cutting into a business’ daily cash flow to repay the advance, often during a period when a business can least afford it.” So while businesses get the money they need to get started, it’s unclear how long it would take to actually pay back Square for the initial cash loan, especially since there’s added interest.

Del Rey breaks it down:

In one of the emails, Square offers to provide the business owner with a lump sum payment of $US7,300. In return, Square charges the owner $US1,022, which works out to 14 per cent of additional cost. As a result, the business owner will end up having to pay Square back $US8,322 in total. … So the business will be done repaying Square the total of $US8,322 once it has reached $US83,220 in sales made with credit or debit cards.

Business owners have kept mum about how long it would take to pay back Square, but one company called Zero Friends, a small store that sells clothing and accessories adorned with drawings of monsters, says it has benefited from Square Capital. Zero Friends used the upfront funds from Square to double the inventory it brought to comic conventions, which allowed it to double its revenue.

There are clearly plenty of potential upsides and downsides to this program, as Del Rey notes. If you make no money, you owe nothing to Square. On the other hand, if you make a lot of money, Square will take a great deal of it away from you, especially since there’s an additional cost of about 13-14%, according to Re/Code.

“We’re trying to reimagine the whole process of getting money to small businesses,” Square’s spokesperson told us.

Back in 2009, Twitter cofounder Jack Dorsey started Square to make commerce easy and help small businesses accept credit cards, basically changing the way money transferred between parties. But while the company’s main product is a smartphone attachment that accepts credit cards, Square has ventured into some other areas of ecommerce, including Square Wallet, Square Order, and a new product that will turn a receipt into a feedback platform.

With regards to Square Capital, the company says it will continue offering money advances to a selection of its clients.

“We’ve always been about figuring out the different pain points of small businesses and seeing how we can solve them, so accepting credit cards was a need, and the reader solves that, but that was only one problem small businesses were facing,” Ury said. “Another was getting access to money to grow. That’s why Square Capital really fits into the Square story.”

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