What you need to know about the Square cash advance program

As recently as late last year, Square was gearing up for an IPO. In recent weeks, however, reports have revealed that the mobile payment startup’s deposit is now on the back burner and that Square, experiencing revenue issues, may instead raise another round of funding.

These problems could explain Square’s new initiative, Square Capital.

With Square Capital, Square would offer cash advances to merchants, lending capital to its customers in exchange for a fraction of future sales plus a fixed cost, Re / code reported. While Square has not made an official statement, Re / code reports that the company is testing Square Capital and has got hold of emails sent by Square to small business owners that describe the initiative.

Few details are available, but based on Re / code’s reports, Square Capital appears to be an option business owners seeking capital should approach with caution.

In one of its emails about Square Capital, Square offered a company a loan of $ 7,300 and said it would charge the company an additional $ 1,022, an additional cost of 14% . So in the end, the total amount the business owner owed Square in this scenario would be $ 8,322.

Unlike typical loans, Square Capital would not have a fixed payment term. Instead, Square would take a 10 percent reduction in the company’s credit and debit card sales on a daily basis until the lump sum total and the added fixed cost are paid off. This means that the time it will take for business owners to repay the loan will depend on the operations and cash flow of the business.

The importance of this is that merchant cash advances do not have a fixed annual percentage interest rate – a very important condition that business owners should be aware of. Under this model, companies could end up with an extremely high or low APR, depending on the revenue they generate.

So while businesses may see Square Capital as a great way to get a little extra cash when needed, they should also be aware of what they are actually signing up for.

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