merchant cash advance

Franz Pfluegl/Shutterstock


Square’s search for new revenue streams is pushing it toward a controversial industry: Merchant cash advances.

The financial product, which operates outside of the regulation of loans, is often a last resort for financing for business owners who either have bad credit, can’t get a bank loan, or can’t get a bank loan fast enough. So the business owner agrees to pay a “lender” a cut of future sales, plus a fixed cost on top, to get a lump sum of money up front.

On Wednesday, The Information reported that Square was experimenting with extending capital to some of its customers, but few other details were available. Since then, Re/code has viewed two emails sent to business owners that describe the product: Square Capital.

The pilot test for Square Capital comes as Jack Dorsey’s company is looking for new areas of growth and new products to offer small business owners as it decides whether to raise another round of funding or pursue an IPO.

This is how Square Capital works. In one of the emails, Square offers to provide the business owner with a lump sum payment of $7,300. In return, Square charges the owner $1,022, which works out to 14 percent of additional cost. As a result, the business owner will end up having to pay Square back $8,322 in total.

Square tells the business owner he or she has as long as needed to pay Square back. “Your $7,300 in Square Capital will only cost $1,022 regardless of how long it takes to pay back,” the email reads.

But this is one way cash advances differ from loans — the business owner doesn’t decide when to repay Square. Instead, Square takes the payment in the form of a 10 percent cut of the business owner’s credit- and debit-card sales every day until the debt is paid. So the business will be done repaying Square the total of $8,322 once it has reached $83,220 in sales made with credit or debit cards.

The amount owed to Square — in this case $8,322 — does not change no matter how long it takes to hit that number, but the quicker a business pays off the cash advance, the more expensive it is. You can see this by comparing them based on a standard metric of borrowing, the annual percentage rate of interest.

If the business has moderate sales and takes a year to reach the $83,220 required to fully pay off the cash advance, the APR on the above example remains at 14 percent. If it only takes six months, however, the APR rises to 28 percent. And if the business has a fabulous first month after the advance in which it pays Square back completely, the APR jumps up to at least 165 percent.

Square is already handling payments for these businesses, so it likely has a very good idea of how long it will take a given business owner to pay it back. But it’s not clear how good or bad of a deal these cash advances are for business owners without knowing what the duration of the payback period is. The two business owners that received the Square Capital emails that Re/code viewed did not respond to my request for information on how quickly they would generate the sales needed to repay Square.

There are certainly use cases in which a cash advance could make sense for a business owner. If a business has a one-time unexpected expense come up, for example, and can’t get a loan or can’t get one quickly enough, a cash advance could be helpful.

The biggest criticism of these types of financial products is that the lender is cutting into a business’ daily cash flow to repay the advance, often during a period when a business can least afford it. On the other hand, if a business makes nothing, they pay nothing to Square, unlike with some other cash advance programs where payment is still required.

Square spokesman Aaron Zamost declined to comment.

Ben S
Ben S

For me, the cost is 12% (not 14%), and the term is about 11 months.

I do about $20,000 per month in cards sales.  And here are my offers:

$7,900 for $8,848 @ 4% (cost: $948; term: 11.06 mos @ $800/mo)

$13,900 for $15,568 @ 7% (cost: $1,668; term: 11.12 mos @ $1,400/mo)

$19,800 for $22,176 @ 10% (cost: $2,376; term: 11.09 mos @ $2,000/mo)

So the monthly cost for these loans is $85, $150, and $215 respectively.


 "If the business has moderate sales and takes a year to reach the $83,220 required to fully pay off the cash advance, the APR on the above example remains at 14 percent. If it only takes six months, however, the APR rises to 28 percent."

This is very misleading because ALL of the interest is charged upon origination. When APR is generally used (mortgages, auto loans, credit cards, student loans, standard business term loans, etc), the borrower is making principal reductions throughout the life of the loan and the APR is charged on a declining principal balance.

Look what happens if I plug in $7,300, 12 month term, and a 14% rate. The monthly payment is $655.45. If I multiply a monthly payment of $655.45 times 12 months the total payback is $7865.40. That is VERY different than $8322. In order to pay back $8322 with 12 monthly payments my monthly is $693.50 ($8322/12). To approximate a monthly payment that high I have to plug in a 25% rate.

For a fuller explanation on misleading pricing practices by merchant cash advance companies and daily ACH lenders please see:

Merchant cash advance companies aren't stupid (presumably, neither is Square). They have a target IRR they want to hit. While it's true that there is no fixed payback, you can bet Square has a very good sense of how long will take to payback based on historical transaction data. An merchant cash advance company or daily ACH lender (e.g. On Deck Capital) worth its salt knows what kind of equivalent APR they expect to generate.


WOW!!!!  This give a whole new meaning to "Loan Sharking!"


When it comes to borrowing money for businesses that can either close, layoff dozens of workers or get a loan with a high factor rate - which choice would you make? 
If a restaurant needs money to add a new section to their dining area which would add 25 chairs - this income from the 25 chairs would be infinite and the only reason the restaurant will survive. So they borrow 25 thousand - payback for this is $34,500 - a total of $9500.00 to borrow $25,000. Crazy, right? But the added section keeps them in business and brings in an additional $30,000 in revenue per month. The restaurant stays in business and thrives - opens a second location hiring additional workers. 

Controversial loan or a lifeboat? Ask the workers, owners and the people who rely on the income if its a controversial loan. 


 Shame on square & jack dorsey for taking a cool payments processing business and turning it into a loan shark business!


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