Square Capital Moves Beyond Cash Advances to ‘Flexible Loans’

Feet in Sea Water

Is it best to dip a toe in the water, or jump in for a cannonball? According to Square, a slow and constant march into the wading party beats both.

The payments company announced today it would move beyond cash advances into a more general loan product. This may mean it seeks a wider customer base as well — more on that below.

The 18-month loans would carry 10% to 16% interest rate, according to the Wall Street Journal. Salt Lake City-based Celtic Bank will issue the loans.

The move was hinted at a few weeks back on Square’s earnings call. Square announced it had extended more than $400 million on 70,000 loans through Square Capital in 2015, with $150 million coming in the fourth quarter. The 70,000 loans went to about 50,000 different sellers. At that rate of growth, it wasn’t hard to believe the company was on track to break even by mid-2016, as investors heard regarding the company’s earnings call.

Square said today the move was made in hopes of expanding its Capital program to empower user goal-acquisition. This change comes after 90% of users accepted a second offered Capital, as noted on the earnings call. This new regularity of re-application to loan programs was accompanied by ongoing correspondence between the company and its customers.

This expansion will not slow the company, Square Capital claims, but will only change the form of continued fast, simple and transparent service. Now, instead of dealing with paperwork or having to reapply in toto with each loan, users will receive requested funds the next day, and repayment happens as a fixed percentage of daily card sales, with a fixed dollar amount incapable of alteration, from borrower or lender.

Customers needn’t look far to try the new service — just take a look at the Square Dashboard to see if offers through Square Capital await. It will be interesting, over the next few quarters, to see how Square’s venture into lending fares compared with marketplace lenders after the same merchants — too small for banks, but still in need of cash. Square’s advantage over those competitors, and even bank underwriters, is its data, and its ability to take repayment on a per-transaction basis.

“We have the data that you want, if you’re going to underwrite well,” CFO Sarah Friar said recently. She also intriguingly floated the idea of Square Capital loans as an on ramp to Square’s payment services:

So, products like Square Capital, we’ve grown to the scale with almost zero customer acquisition costs. It doesn’t mean at some point we won’t do customer acquisitions, maybe use Square Capital as its own on ramp to Square, maybe not payment processing, but starting out with something like Capital to bring you onto the platform to do things like payments.

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