Square, the company who makes those little square card readers that you can use with a iPad or other such device, is branching out into loans for small businesses. Actually, they’ve already gotten into the game and offered cash advances to companies for most of 2015. They issued $400 million in advances that year, mostly in the fourth quarter, and now they’re building on that activity.
Square Capital, the program through which they offer the cash advances, is adding flexible loan products to their repertoire. Loans would carry an 18-month term, with a 10-16% interest rate, and the loans would originate with third-party industrial bank Celtic Bank. Others, like OnDeck and Lending Club, have already tried such programs.
Square has a unique advantage over other companies operating in this product sector by having built-in data collection to help them assess potential borrowers. By analyzing the data provided via payments accepted through its card readers, they’ll be able to figure out the kind of credit that a borrower has. They’ll also be purchasing some of the loans themselves in order to assume some of the risk involved in the venture, which should shore up the confidence of investors and borrowers.
Square is making the move in order to diversify their business model and increase sales outside of their readers. Although the readers are popular, the company maintains that they are not yet profitable, and they’re hoping that the loans can help out with that. They will likely focus on smaller businesses, which have had a hard time accessing capital since the 2008 financial crisis. After that, banks tightened up their loans, which made it harder for smaller, newer businesses to get off the ground. By helping smaller businesses grow, Square is helping them bring in more business, which turns into more sales through Square card readers.