Square Begins Offering Data Driven Cash Advances to Small Businesses | Hacker News Reader

Square Begins Offering Data Driven Cash Advances to Small Businesses

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97 pointsASquare47 comments

When I started my first small business, I poured my life savings into it. Six months later all that cash was gone and I wasn't making rent or car payments on time. PayPal gave me the option for a lump sum of money ($10k) in exchange for a percentage of my sales (30%) - the loan cost me about $750 dollars in interest to PayPal, and saved the business. With enough runway for 2 months, I fixed the business model and cut unnecessary staff/expenses. Six months later, the business was profitable again, all thanks to a small cash infusion.

The point is, I could have been homeless. PayPal's financing gave me enough time to fix a broken business model, which is a situation I'm sure many other small business owners are in.

> percentage of my sales (30%)

did they take 30% of each sale until the full $10,750 was paid back or... ?

Yes - they had a table where they compare loan amounts (anywhere from 1 - 10k) and amount to be repaid (usually around 7 - 10% greater than the loan amount) and the percentage of sales that would be used to repay the loan. Paying a larger percentage of sales significantly reduces the interest rate.

As a side note it's good to hear a positive PayPal story on HN.

The thing about positive reviews of PayPal(and by extension all products) is that they are going to be much less vocal and much less frequent because it's expected for the product to just work. Most of the time paypal does what it should and people are happy with them.

fwiw. the ones that I have seen that are negative w.r.t. paypal are the ones that are doing something forbidden by the tos or at least very close to the grey line.

Small business are just that: small. It takes time that they don't have to go through the normal loan application process.

Square wins because they already know its a good bet. The merchant wins because they don't have to spend time on something other than their core business (which is probably why they chose Square in the first place).

My first thought: what a good idea.

My second thought: why didn't the card issuers think of this first? They're actual banks and their whole business model is lending money.

The merchant cash advance industry is already a huge thing. It probably provides more funding to restaurants, for instance, than banks do.

https://merchantfinancing.americanexpress.com/merchantfinanc...

FYI PayPal started a similar program last fall: https://www.paypal.com/webapps/workingcapital/

Based on the examples given in the article and at https://www.paypal.com/webapps/workingcapital/success, which are presumably the most favorable ones possible for both companies given the nature of PR, Paypal also charges less than half as much ($800 on a $20k loan for Paypal vs $1k on a $10k loan for Square). That might be misleading, though, because Paypal's case study doesn't mention the repayment period.

I got a call the other day offering the working capital / the offer terms were absolutely amazing. I think some of that though was because they knew from our account we most likely didn't need the money.. Paypal also matched our CC rate to get us to accept Paypal on the site. I warned them when I signed up 'I've heard the horror stories and any sign of that and we're done' .. been 2 years and still great

Worth noting that https://www.kabbage.com/ is a startup focused on providing this as a stand alone service. They've raised good sums of money so seem to be doing well. Have a partnership with Stripe etc.

I've received a 9K working capital from PayPal a year ago, repaid it already. Just saw your message and tried to apply at kabbage, added my PayPal account, business checking account and it still asks for more to qualify...

Is Working Capital still working though?

This is a review we wrote for Square Capital https://www.fundastic.com/posts/25-what-does-square-capital-...

It's a much better than merchant cash advances, OnDeck or Kabbage in terms of cost.

The example given is a $10k advance with $11k paid back, but the article also says that "fees appear to be 1/8 to 1/10th of what you’d pay a typical loan organization to get your hands on cash." I'm curious how they're defining "fees," since I can't imagine a "typical loan organization" would charge 80% annual interest.

They also mention 10 months as the term of the advance, and I think that’s for the same $10k/$11k example. Assuming equal payments of $1,100 every month, that would make the APR about 23%.

There’s an element of equity here because if sales are lower than expected, and it takes 15 months to pay back the advance, the APR ends up at only 16%. If sales are higher than expected, the APR would be higher, 34% for a 7-month period.

It's a merchant cash advance. The cost is higher than a traditional loan that you'd get from a bank, because most of the merchants that get these loans wouldn't qualify for a bank loan. The fees can be pretty outrageous (15-80% APR).

If these small businesses could get a loan from a typical loan organization, Square wouldn't have a market

http://www.bloomberg.com/news/2014-05-22/wall-street-finds-n...

The simplicity is probably going to drive their adoption. Typically securing a loan for a business is a lot of paperwork, back-and-forth, etc. In other words, time away from your business. If Square removes all of that, they're leagues above any offering from typical lenders

Solid point

Does Square have a phone number yet? Last time I dealt with them support was only by web form and email

This is the financial services industry's equivalent of "We'll monetise by sticking ads around it": "We'll monetise by advancing loans and collecting interest"

Whoever can find more borrowers at the edges gets plenty of short term profitable business, but we all know how it ends...

> but we all know how it ends...

billion dollar companies?

This is what makes capital markets work in the long run. A naïve lender treats all borrowers similarly. A new entrant, with better data or analytics, is able to discern a quality gradient amongst the borrowers.

This new entrant can now offer loans to the higher quality borrowers at a better rate. That makes it easier for sound businesses to borrow cheaply. The new entrant can also discriminate against riskier borrowers with a higher rate. That protects capital and makes the system sturdier.

Adding information, the way Square seems to be doing, to a financial process is sound economics. This is not the stuff of gimmicks.

Does Square have access to information that credit card companies do not? If not, why haven't CCs started a similar program (or have they)?

A credit card is by definition a loan, so Id say they have. Thats why when you open a new business you have an Orcas weight in "sign up for this credit card" envelopes at your door.

Good point.

Credit card companies are heavily regulated. There may be limits to whether they can do with their point-of-sale data.

More critically, their data may have limited power for predicting businesses' creditworthiness. MasterCard can only see MasterCard transactions. This is fine for evaluating the cardholder, particularly if MasterCard is at the top of their wallet. But it produces a conditional view if one wants to estimate a merchant's cash flows. Square, on the other hand, sees a broader swath of a business's transactions. This might give it a small statistical edge in certain cases.

There is an entire Merchant Cash Advance industry based around these kind of loans. It was a big innovation around 16 years ago.

> Whoever can find more borrowers at the edges gets plenty of short term profitable business

Also, long term profitable business. See: Capital One. Yes, they lend for individuals, not businesses, but the majority of their card customers are on the low-end of the spectrum.

Here's an old (2012) article with context: http://www.nytimes.com/2012/04/11/business/lenders-returning...

I find it funny that the article repeats several times the amount of data that square. Do you know who has more data? The bank where the business has its account ;)

That being said, the current process from banks seems old and not really clever to me

But at least with Square we have relatively more transparency about their activities and intentions with such data. So while it may not literally be more, it's like functionally more?

I think the main point trying to be made there was that there is nothing stopping banks from doing something similar. In other words the "data" the article keeps mentioning isn't the advantage that makes this possible for Square.

The problem is most banks don't have the technology to scan a customer's bank account and decides his/her credit worthiness. That's how antiquated banks are and they wouldn't touch anything subprime after 2008 financial crisis.

Square gets item level data on each merchant. That means exactly what was sold and when. Plus, they get info about who bought it and can see things like a buisness suddenly getting huge numbers of new buyers as opposed to returning, etc.

The real question is how much does that level of granularity really matter?

Its not worth a banks time, with their current set-up, to process loans under $50,000.

I could see this mostly serving small businesses that already use Square. The alternatives (AR funding, bank working capital funding,...) seem to be better/cheaper than Square. Can't argue with Square though trying to expand its business.

financing working capital is a highly competitive business where banks are really good at (large balance sheets that can compete at 'no cost'). yes, this service might go to businesses that are underserved by banks, but then at what cost is this service to the smb? 10%, ouch.

This seems like a weird turn for Square to take. I would think that the regulatory crap that comes with becoming a bank would be a nightmare for someone like Square trying to move from being a payments processor to an actual lending institution.

Like most financial startups, Square doesn't bother with laws. Shoot first, ask questions later.

https://www.idfpr.com/DFI/CCD/Discipline/SquarePersonifiedCD...

http://techcrunch.com/2013/08/16/square-fined-507k-in-florid...

You don't need to be a bank to make a loan

http://www.sba.gov/community/blogs/community-blogs/small-bus...

It's kind of funny. In some ways the good news for Square is people think this is innovative. The downside are comments like this "Seems super risky/weird" The good news for Square is it's really fairly common stuff (see other examples like PayPal and Kabbage) but therefore it's less likely to move the needle all that much.

Forbes.com 4/21/2014 @ 10:59AM - "Why Square Needs To Sell Itself--And Do It Quickly" http://www.forbes.com/sites/stevenbertoni/2014/04/21/why-squ...

This is a really scary thing for Square to be doing.

Remember the golden child that was Groupon? Their business model was not deals, but short term loans to businesses (I pay you now for X widgets minus a percentage, at some point in the future you need to provide X widgets). We all know how that one ended...

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