Square, which started as a small, smartphone-friendly credit card processor in 2009, has become a major player in providing financing to small businesses.
Square’s lending arm, Square Capital, began offering merchant cash advances to its customers in 2014. Since then, Square Capital has shifted away from offering MCAs and now partners with Celtic Bank to offer the Square Capital Flex Loan, which has a fixed term. (However, repayment is based on a percentage of your daily sales, which mimics how MCA repayments work. More on that below).
According to the company, Square Capital has facilitated $1.8 billion in merchant cash advances and loans to more than 141,000 small-business customers.
“Square Capital was built specifically for small businesses to improve access to funding to help them grow,” says Dan Mahoney, the communications lead for Square, adding that 84% of borrowers report using the money to help grow their business.
Here’s what you need to know about the Square Capital Flex Loan and how it compares with other small-business financing.
Square Capital loans at a glance
How Square Capital works
How to qualify: Unlike more traditional lenders whose products may be available to any qualified small-business owners, the Square Capital Flex Loan is available only to small businesses that use the Square point-of-sale product.
Square Capital sends pre-qualification loan offers to eligible small businesses that use its POS system. Because Square has access to your transaction and sales histories through the system, it uses your current financial information to determine the loan amount and terms. You can then choose the loan amount that’s right for your business needs.
Want a loan but haven’t received an offer? You can take a short survey that helps Square Capital analyze your business. When determining loan eligibility, the company reviews two key factors: your processing volume — it typically wants to see $10,000 or more in sales a year — and your recent payment transactions.
The company also considers your history with Square, whether you’re an active Square seller and the number and frequency of your payments.
Loan amounts: Square Capital offers loans of $500 to $100,000. The average loan size is $6,000, according to the company.
Borrowing costs: Square charges a one-time fee, which averages between 10% and 16% of your loan amount.
Repayment terms: You’ll repay your loan from a fixed percentage of your daily credit card sales — typically 9% to 13% — similar to how a merchant cash advance repayment functions. You pay more when your sales are strong and less when sales are weak. However, the total repayment amount doesn't change. Repayments are deducted automatically from your Square account.
Square Capital loans must be paid off in full within 18 months of the acceptance date. Any amount unpaid after 18 months will be due in full. Your daily repayments depend on your sales, but you must pay at least one-eighteenth of your initial loan amount every 60 days. Square Capital’s servicing team may contact you if you are close to missing a payment requirement.
You can make additional payments toward your loan and prepay it early without a fee, though Square Capital’s upfront fee means you won’t benefit financially from paying the loan back early.
Payment example: Say you’re offered and accept a $10,000 loan with a repayment option that takes 11% of your daily sales. Here's a breakdown of the fee and total payback amount, according to the company.
$1,200, or 12% of loan
Total payback amount
Percentage of daily sales for repayment
In this example, you’d be required to pay back at least $622.22 (one-eighteenth of the loan amount) every 60 days. However, that’s the minimum; Square Capital may reach out to you if you’re at risk of falling behind, because you won’t pay back the loan in full by the end of the term if you’re hitting only the one-eighteenth requirement.
So on a given day, if your sales were $1,000, you’d pay back $110 ($1,000 x 11% daily). If you were able to maintain a similar pace each day, your total loan cost of $11,200 would be paid back in a little more than three months.
Pros and cons of Square Capital loans
Easy application process: Because Square proactively offers you a loan option, you don’t have to worry about searching and applying for funding. If you accept a Square Capital loan, however, you may be required to submit extra documents to verify your business identity and history.
Upfront information: You’ll know exactly how much you will owe before accepting a financing offer. While your daily payments will vary based on your sales, your daily repayment rate and total amount owed will never change.
No prepayment fee: If you pay off your loan early, you won’t face any prepayment penalties.
Need to be Square POS customer: To be offered a Square Capital Flex Loan, you have to use one of Square’s POS payment processing tools.
Payments are fixed percentage of daily sales: Similar to the repayment of merchant cash advances, you’ll pay back your Square Capital loans with a fixed percentage of your daily credit card sales. While daily payments could be a benefit for some businesses, they could throw off your business’s cash flow; some small-business owners prefer fixed weekly or monthly payments instead.
Short terms and small borrowing amounts: Square Capital’s maximum borrowing amount is $100,000, which is smaller than loans offered by most lenders, and the average Square Capital loan amount is $6,000. While the low limit is handy for covering everyday expenses or small inventory purchases, it won’t help with big expansions or major growth opportunities. And if you do receive an amount on the higher end, you have only 18 months to pay it back.
Square Capital vs. other sources of financing
Square Capital’s proactive approach to offering financing can be both good and bad for small-business owners. Having a loan offered to you without the hassle of finding and applying for financing is a huge time saver for busy small-business owners. However, it also can encourage them to borrow even if they don’t really need it.
If you're in the market for a small-business loan, shop around. There are many sources of small-business financing and many types of loans, including term loans, lines of credit, invoice financing and Small Business Administration loans. You’ll want to start your search at local banks and credit unions for the best rates, especially if you have an established business with strong finances.
Small-business loans from your bank or credit union will offer you the best financing rates. However, that process can be long and complicated, making the pre-qualification offers from Square an attractive alternative for busy businesses. Regardless, it’s worthwhile to establish a relationship with your local bank because the cheaper financing it offers will be financially beneficial down the line.
Online alternative lenders
Online alternative lenders sprang up during the Great Recession when banks and other traditional lenders weren’t offering financing to small businesses. With looser qualification standards and quick applications, alternative loans are often easier to qualify for, making them an option for borrowers who can’t qualify for a traditional loan. While the Square Capital Flex Loan is technically an online alternative loan, its scope is limited to current users of the Square product.
Merchant cash advances
Merchant cash advances and the Square Capital Flex Loan have similar repayment features, but having a specific term length helps to differentiate Square’s product from the high-cost merchant cash advances. MCAs are an advance on your future credit card sales, and you repay that advance with a daily percentage of your credit card sales until the loan is repaid. MCAs don’t have a set time frame for repayment, so you could end up paying them back over years, resulting in an annual percentage rate that can reach into the triple digits. Because your sales fluctuate, so do your daily payments. Though speedy, MCAs are largely unregulated and are a risky financing option.
Business credit cards
Business credit cards also offer the opportunity for future financing that the Square Capital Flex Loan does not. You’ll likely have a smaller credit line than with a business line of credit — typically up to $50,000 vs. $1 million-plus — but a credit card is convenient for everyday business purchases. Business credit cards also may offer rewards such as cash back and travel points.
Find and compare small-business loans
NerdWallet has created a comparison tool of the best small-business loans to meet your needs and goals. We gauged factors including lender trustworthiness, market scope and user experience, and arranged them by categories that include your revenue and how long you’ve been in business.