Square’s Cash Advance Program Is Funding 10000 Merchants

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 announcedin May.

Heres 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/Codes Jason Del Rey points out, Squares new program is effectivelycutting 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, they dont get to adjust Squares cut of their intake until the advance is paid back in full. That said, at least Square will never change the flat percentage of sales it takes from customers, so all merchants know exactly what theyre signing up for.

Del Rey breaks it down:

In one of the emails, Square offers to provide the business owner with a lump sum payment of $7,300. In return, Square charges the owner $1,022, which works out to 14 percent of additional cost. As a result, the business owner will end up having to pay Square back $8,322 in total. …So the business will be done repaying Square the total of $8,322 once it has reached $83,220 in sales made with credit or debit cards.

Business owners have kept mum about exactly 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 todouble 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, once you make a lot of money, Square will take a portion of your sales.

Were trying to reimagine the whole process of getting money to small businesses, Squares 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 companys main product is a smartphone attachment that accepts credit cards, Square has ventured into some other areas of ecommerce, includingSquare Wallet,Square Order, and a new product that willturn 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.

Weve 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. Thats why Square Capital really fits into the Square story.