Square is a six-year-old start-up that literally made a name for itself with the shape of the little device that attaches to a smartphone or tablet and is used to swipe a credit card. It’s allowed small businesses to offer quick and convenient credit card processing from just about anywhere there’s a signal.
There’s a slight problem, though. According to The New York Times, what’s good for Square’s customers isn’t good for Square’s business; margins for transaction processing are too thin after splitting fees with the credit card companies and it’s too expensive to acquire new customers, not to mention there’s substantial competition from PayPal, First Data and Amazon, which all offer similar services.
Fortunately for your businesses, Square is using the data it collects for transaction processing to enable offering new services that further disrupt traditional merchant lending options. While more profitable for Square, these services offer small business greater flexibility, affordability and ease of use.
Should Your Company be Square?
Square Cash is a smartphone app that accepts non-credit-card payments for goods and services as a substitute for checks and cash. It’s free for small amounts of personal transfers, and the Pro version for merchants assesses a per transaction fee of only 1.5 percent. It’s a quick way to keep your cash receivables current and more immediately available. One possible hassle is that your customer must have a debit card to send a payment.
Square Capital offers cash advances for small businesses to purchase inventory and equipment, expand facilities or hire new employees, according to Fox Small Business Center. Instead of charging interest, Square Capital sets an upfront fee plus a percentage of daily sales made through Square.
Here’s where the synergies with the Square transaction processing platform really come into play: payments for the advance and the percentage are paid back as a deduction from daily sales made through Square transaction swipes. Moreover, Square uses the financial history of prospective customers that have used its swiping platform to determine whether to make the cash advance and for how much.
Related Article: Getting By Without a Business Loan
Other New Loan Technologies
Square isn’t the only company using new technologies to disrupt traditional bank lending. Other players include:
- Kabbage (as in “cabbage,” the green stuff, get it?) offers small loans ranging from $500 to $100,000 to all small businesses. Wired reports that Kabbage customers get six months to repay with interest that ranges from two to seven percent based on credit score and revenue. Kabbage uses an automated system to assess investment risk that Kabbage says provides a much better picture than the financial statements banks focus on.
- OnDeck Capital is a financial lending platform that employs proprietary software to assess small business loan eligibility. Forbes notes that this makes the loan granting process much faster by eliminating paperwork required by a traditional bank. In lieu of monthly payments, OnDeck withdraws small daily increments from customer bank accounts.
- Fundbox targets B2B businesses, helping them deal with short-term cash flow issues by clearing invoices immediately, instead of waiting 30 to 60 days for customers to send payment. According to Geektime, Fundbox uses a variety of data mining tools to determine the likely business risk and claims it can underwrite a small business loan in less than a minute. It’s acceptance rate is about 50 percent, a much higher rate than bank approval for small business loans to cover cash flow issues.
You can still go to a bank for a loan if you want. But given the advantages and convenience of these services, and the likelihood of even more options developing, you and your bank have more to consider why you would need to.