Square's New Business Strategy: Lend Money To Small Businesses

Square is doubling down on small business.

The San Francisco-based mobile payments company â€" which relies primarily on small business clients for its own revenue â€" announced Square Capital on Wednesday, a new cash-advance program for funneling money into small businesses in need of a loan.

Square won't require small businesses to actually apply for a cash advance. Instead, it will approach companies that use its Square technology to process payments with cash advance offers. Each offer will be unique, says Square's Product Engineering Lead Gokul Rajaram, and Square will base the proposed capital amount and expected return on each company's sales data that Square has access to.

Small businesses will pay back the loans bit by bit, giving Square a small percentage of future sales in return. For example, if a business borrows $10,000, they may pay Square $11,000 in future credit card sales. Square usually takes 2.75% of each transaction, but a small business that took a Square cash advance might pay back 10% on top of the 2.75% until their advance is paid off, says Rajaram.

Of course, small business loans can be risky, which is why a lot of companies Square spoke with ahead of the pilot were turned down by big banks who weren't sold on their business. Rajaram isn't worried, however. The sales data Square has from its small business users offers a better look at how the company is doing than any application could, he adds.

Unlike a traditional loan, Square's cash advance has no timetable for repayment, meaning businesses pay more when sales are good, but aren't handcuffed with payments when things slow down. Square will offer each capital advance under the assumption that funds will be paid back in 10 months, although that isn't required.

"Square Capital, Square Order, Square Market â€" all of these things are just part of a holistic suite of services we're building," says Rajaram. "When we think about what we should work on [or] what we should build, it's all about [asking], 'do these services help sellers run and grow their business?' Square Capital helps them grow their business."

Square has been piloting this Square Capital since last year, and has already loaned out "tens of millions of dollars" to thousands of different small businesses. Cafe Grumpy in New York used a Square cash advance to open a sixth location in Grand Central Station. Follicle Hair Salon in San Francisco added 12 new salon chairs with its cash advance.

Zero Friends, a clothing company with a shop on Haight Street in San Francisco, has already accepted two cash advances from Square, co-founder Darren Scott told Mashable. The first, which the team took last spring, helped Zero Friends double its inventory for Comic-Con International in San Diego, an important convention for company sales.

Zero Friends was able to pay back its advance (which Scott declined to specify) in roughly six months.

"It's been great, especially with smaller sums of money that you're taking out compared to what people are usually going to a bank for," says Scott, who added he wouldn't shy away from taking out a third advance in the future. "I like the payback system, I like that there [aren't] late fees at all."

A look at some of the artwork from Zero Friends in San Francisco. Zero Friends has already taken two cash advances from Square.

This early feedback has been a major point of pride for Rajaram. Square says that in a survey of more than 1,000 pilot companies, 85% reported they would be “extremely likely” to recommend the Square Capital to a friend.

The new program is a first for Square, which is seeking additional revenue streams to accompany its standard payments services. Despite a sprawling San Francisco headquarters, and new digs scheduled to open soon in New York, Square still isn't profitable. The Wall Street Journal reported earlier this year that Square actually lost $100 million in 2013.

The company's business model relies on thin margins, where much of the 2.75% taken from each credit card transaction is actually paid back to the credit card companies. It's required Square to cater to its clientele in other ways.

Earlier this month, Square released a new app that allows users to order food from restaurants prior to an in-store pickup. (Square unveiled similar technology for the web in late April.) Square also accepts Bitcoin now for its online marketplace, just another way for businesses to cash in on potential customers.

Lending money to small businesses may not be as sexy as Bitcoin or consumer apps, but Rajaram says Square isn't approaching this timidly. "We want to advance as much capital as we can."

Only time will tell if it's a bet that'll pay off.

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