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Square's Capital Lending Program


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I just got a notice from square that they were loaning money now, based on your credit card transactions.   9%, 11% and 13% interest.   Some sort of factoring type loan I suppose.   The more you borrow, the higher the interest rate ....Aren't those rates extremely high?   Anyone else see this?

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Guest JBaymore

Those are absurdly high lending rates.  Anyone who borrows money at that kind of a rate is likely "financial understanding challenged" and is headed for a disaster eventually.

 

best,

 

.....................john

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^ It looks absolutely horrible.   If you get an advance of $4500, you pay 13% of card sales, paying back $5152.    Apparently they just automatically deduct 13% of your card sales until you have paid it back.  So I read it wrong.   $652 in interest.    So ... eeeek 14.5% interest.  I'm surprised they are doing this.

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^ It looks absolutely horrible.   If you get an advance of $4500, you pay 13% of card sales, paying back $5152.    Apparently they just automatically deduct 13% of your card sales until you have paid it back.  So I read it wrong.   $652 in interest.    So ... eeeek 14.5% interest.  I'm surprised they are doing this.

 

 

Dirt Roads,

 

The cost for this loan is a fixed fee not an annual interest rate, with the fee being the same whether you pay off the loan on day 1 or in 2 years.  The fee is typically between 10-14% of what you borrow.  Square then deducts a percentage (also 10-14%) from each subsequent credit card transaction until the loan and fee are paid in full. 

 

While in theory, it could take you 2 or more years to pay this back, per this article the pay back period is typically 10 months. 

http://www.techrepublic.com/article/square-offers-cash-advances-to-businesses-through-square-capital/  In that case, the effective cost of borrowing is at an annualized interest rate that is even higher than what you calculated. 

 

Square only makes this program available to certain customers - i.e., they run the analytics and know your credit card transaction history/how fast you will likely pay back the $.

 

Advantages seem to be ease/speed of getting a loan for businesses that cannot otherwise qualify for typical financing.  Capital funding, if you can get it, is always very expensive for higher risk borrowers.  

 

In my mind, some additional things to ponder for small businesses are:

1. Is your card set up through a business entity with limited liability (LLC, S-corp, C-corp, etc) or is the account in your individual name?

2. Does Square require a personal guarantee for the loan even if the answer to question 1 is that the borrower is a business with limited liability?

3. As the article says, you better know your sales margin.

4. What's in the fine print of the loan agreement?

 

-SD

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I agree with S Dean I think. If a small operator was trying to bridge a cash flow gap, say Jan - Mar (after some unexpected expense) and then chunk it back in show season it really does not seem to be bad business to me. Obviously show artist should plan ahead for whatever their slow/no show period is going to be but life sometimes does not cooperate with good plans and the business may be in otherwise perfectly fine condition. This rate in that situation would be pretty competitive and would likely be better than using credit cards. A bank line of credit other than against your home may not even be an option. These days a lot of home owners don't even have equity available for a LOC against it with so many still upside down. 

 

Square tossing a 'fairly low cost for what it is' loan program in the mix I don't think is predatory and just because someone needs a short term loan does not mean they are not doing fine with their budgeting. I have had unexpected expenses that are waay more than I would have planned for. Get a couple big unexpected expenses and anyone might have to scramble to patch a cash hole. Higher priced credit is not by definition bad.

 

 

 

 

 

note: I'm also showing my age by admitting that those rates for a business loan with no collateral just don't seem that high to me. Fifteen years ago those would have actually been pretty good rates for a secured business loan to most small businesses. But times have changed.

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well keep in mind the flip side of this was that you could get so much better returns back in those days which meant safely saving for retirement was a lot easier. These days the only game in town for most people is a stock market that is breaking records and trading at its peak. That means a lot of retirement money will disappear in an instant when the correction hits. The ones that are just b4 or barely into retirement will get clobbered with little time to recover.

 

Not a big fan of the current extremely low interest situation although I do like my 4 1/4% home loan :-)

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Stephen,

 

Good points/analysis. I was not trying to advocate one way or another, just provide some additional information so people can make a more informed decision/do their own due diligence.  

 

Like you I can remember when interest rates/cost of capital was not at the record lows we've had the last few years.  I worked for a publicly traded start up company that was in a high growth mode acquiring real estate assets with long term revenue streams.   Back in 2000 our cost of capital was 12~13% and these notes were secured by assets required to be held in bankruptcy remote special purpose entities.  Another company that I worked for from 2010-2012 had venture capital investors that were seeking double digit returns on investment for money loaned in 2008.  

 

I too suspect that Square's program is at a lower rate than a credit card cash advance on a credit card.  Ultimately, it is another lending option.  If a borrower can qualify for a better deal, then take it.  

 

-SD

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