

Square Begins Offering Data Driven Cash Advances to Small Businesses - ASquare
http://techcrunch.com/2014/05/28/square-begins-offering-data-driven-cash-advances-to-small-businesses/?ncid=rss

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primitivesuave
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.

~~~
jusben1369
As a side note it's good to hear a positive PayPal story on HN.

~~~
weaksauce
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.

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thecosas
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).

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jrockway
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.

~~~
cm2012
The merchant cash advance industry is already a huge thing. It probably
provides more funding to restaurants, for instance, than banks do.

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Anechoic
FYI PayPal started a similar program last fall:
[https://www.paypal.com/webapps/workingcapital/](https://www.paypal.com/webapps/workingcapital/)

~~~
GregorStocks
Based on the examples given in the article and at
[https://www.paypal.com/webapps/workingcapital/success](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.

~~~
redorb
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

------
yunfangjuan
This is a review we wrote for Square Capital
[https://www.fundastic.com/posts/25-what-does-square-
capital-...](https://www.fundastic.com/posts/25-what-does-square-capital-mean-
for-small-businesses)

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

------
GregorStocks
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.

~~~
chrisgd
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...](http://www.bloomberg.com/news/2014-05-22/wall-street-finds-new-
subprime-with-125-business-loans.html)

~~~
greghinch
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

~~~
chrisgd
Solid point

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

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mpclark
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...

~~~
JumpCrisscross
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.

~~~
grimtrigger
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)?

~~~
bksenior
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.

~~~
grimtrigger
Good point.

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plunchete
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

~~~
ryderm
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.

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

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coreymgilmore
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.

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antr
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.

------
JonFish85
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.

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

[http://www.sba.gov/community/blogs/community-blogs/small-
bus...](http://www.sba.gov/community/blogs/community-blogs/small-business-
cents/financing-alternative-non-bank-lenders)

------
iamchmod
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...](http://www.forbes.com/sites/stevenbertoni/2014/04/21/why-square-needs-
to-sell-itself-and-do-it-quickly/)

------
dsl
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...

