Square Capital Loans Guide

Learn about Square Capital Loans vs. loan alternatives

Phone with a Square app on a POS keyboard.

The Definitive Small Business Guide to Square Capital Loans

Most small businesses in retail probably already know about the credit card processing point-of-sale (POS) system called Square. You might also know that Square offers financing for certain small businesses.

In this guide, we will walk you through Square Capital loans. We will also compare them to other loan alternatives. If you are considering working capital financing, there are some things you should know about how Square Capital loans stack up against their closest competitors in funding options. After reading this guide, you’ll be armed with the information you need to make an informed decision about working capital for your small business or retail store.

What is Square?

What makes Square different from other point of sale systems is that it does not charge any monthly fees. Instead, Square charges a flat rate per credit card transaction. The flat rate is the same regardless of what type of card your customers use to pay. This means knowing exactly how much you pay each month without the hidden costs such as minimum monthly charges.

Square customers are typically retail stores, small shops, cafes, and restaurants. With the Square POS software, you have a pay-as-you-go payment processing solution for which you pay a flat-rate fee.

Square typically charges three different rates that depend on the type of transaction:

  1. In-store transactions: flat rate of 2.75%
  2. Online transactions: 2.9% + $0.30 per transaction
  3. Keyed-in transactions: 3.5% + $0.15 per transaction

Beyond Square’s POS system, they also have a payment processing program called Square Market. Square’s software and hardware payment products extend to Square Contactless and Chip Reader and Square Register. Square Cash is Square’s program for person-to-person money transactions. And Square’s answer to the traditional merchant cash advance (MCA) is the Square Capital loan.

What is a Square Capital Loan?

The way Square Capital loans work is much like how merchant cash advances work. However, Square Capital loans are specifically for businesses that process credit card payments through the Square POS, and Square Capital loans are only available to selected and approved Square sellers.

Similar to an MCA, your sales performance and history play a role in determining the loan amount. The difference is that Square bases your loan amount (and decides approval) based on your Square sales, specifically. Square does not require that you provide a personal guarantee and there is no need to put up collateral. To borrow, you pay no application fee. There are no origination costs, no compounding interest, or closing fee. Instead, you pay one flat fee.

If you’re an approved Square user, you can use your Square Capital loan to help pay your bills or otherwise help your business grow. Of course, there are many other funding options out there if you need to buy equipment, hire more employees, or increase inventory.

How Repayment Works with Square Capital Loans

With Square Capital Loans, you can loan as little as $500 and as much as $100,000. You are presented with three loan option possibilities if you are considered eligible for a loan. You can also customize your loan offer by choosing any amount up to your maximum. Your loan offer details the following:

  • Loan amount: The borrowing amount is the amount of money you will receive from Square Capital.
  • Fixed fee: Square charges a fixed, predetermined fee for borrowing the funds. The fee typically depends on your borrowing amount. Generally speaking, the higher the borrowing amount, the higher the fixed fee. A multiplier, called a factor rate, determines the fee. Square Capital’s factor rates range between 1.10 and 1.16. This means that your fixed fee is between 10% and 16% of your loan amount.
  • Repayment percentage: Your payments are based on a fixed percentage of your daily credit card sales. Repayment rates depend on the specifics of your business and situation, but typically range between 8 and 15%.

Because your payments are based on a fixed percentage of your daily credit card sales, rather than a fixed amount, you know that you’ll be about to make your payment each day. Square doesn’t offer any incentive such as discounts or rebates for early repayment. There is no maturity date on your loan; however, the maximum repayment term is 18 months. If you haven’t paid off your loan at the end of 18 months, you are obligated to pay the remaining balance.

Eligibility, Qualifications and Application Process

As we mentioned, only Square sellers are eligible for Square Capital loans. However, being a Square seller doesn’t mean you automatically qualify.

The following factors also determine your eligibility:

  • Processing volume through Square: Square looks for businesses that have processed $10,000 minimum or more in the last 12 months.
  • Account history:Square looks at your history to spot trends for business growth.
  • Payment frequency:Square looks at how recent your payments are. If you’re taking payments at least once a week, that’s a good sign.
  • Activity level: The number and frequency of your payments play a significant role in Square’s decision to offer your financing. They want to determine if your level of activity is good enough to support repayment.
  • Customers: The diversity of your customers matters. If you have a steady flow of both new and repeat customers, it means your business is doing well, and you are more likely to qualify.

Square sellers will know if they have been pre-approved to receive financing through their Square Dashboard. They will receive both an email and notification in their dashboard with a customized loan offer based on an amount that Square determines their business can support. Therefore, the best way to determine if you are eligible for Square Capital loan is to open your Square Dashboard to see if you have an invitation to accept a loan offer.

Because you discover your eligibility through the dashboard, (and you don’t have a lot of control over when and if you do get an offer from Square) there’s no need to apply. There’s no need to undergo a business and personal credit check. You also don’t need to fill out an application form or submit financial records. All you have to do is accept the financing offer and receive the funds in your business bank account within a few business days.

If you’re not a Square seller, you have other financing options that are similar to Square Capital loan. While Square Capital has never classified themselves as a merchant cash advance, the concept and daily repayment structure are very similar, so it’s worth comparing the two.

Merchant Cash Advances

Merchant cash advances or MCAs are technically not loans. They are financial products offered by a lender who purchases a percentage of your future credit card sales. The lender will look at your daily credit card sales to determine if you have the capacity to pay back the funds.

An MCA agreement between a lender and a business owner will typically cover a number of factors, including:

  • Advance amount: The advance amount is the lump sum you receive when MCA is approved. Your business’s financial strength determines the funding amount.
  • Payback amount: The payback amount is the amount that the business owner must repay. It is calculated based on the amount funded plus fees called a factor.
  • Holdback: The holdback is an agreed-upon percentage of the daily credit card receipts which are withheld to pay back the MCA.

The amount that you are eligible to advance will depend mostly on your average credit card sales. Depending on how much capital you need, and how much the lender decides you are qualified to receive, the MCA can be as little as 50% of your monthly sales or all the way up to 250% of your monthly sales.

To repay the cash advance, the lender calculates a percentage amount to take with each credit card sale over the repayment period. The agreed-upon percentage is called a “holdback.” The lender withholds that amount each day, directly from your credit card receipts, until the cash advance is paid back in full.

If your business is doing well and receives more credit card transactions, you’ll end up paying back the advance sooner. And because repayment is based on a percentage, if your sales are low on a particular day, the amount taken from you is relative to your incoming cash flow, just like with Square Capital loans.

MCA details and requirements vary depending on the provider and your business. The typical minimum qualifications for an MCA are:

  • 1+ years in business
  • $50,000+ in annual revenue
  • 500 minimum credit score

Merchant cash advances offer quick solutions to businesses who need access to funds immediately. However, because the law does not recognize them as a loan, they’re not regulated. This explains why some lenders impose high APR rates that are rumored to reach as high as 80% - 120%.

Traditional Bank Loans

Though MCAs are quite popular, most business owners probably think of bank loans first when they consider business financing. Term loans and lines of credit are the most conventional types of bank loan. With a conventional term loan, you get a lump sum of cash upfront which you must repay with interest over a predetermined period. Traditional bank loans can be used to purchase inventory, equipment, commercial real estate, and even to acquire other businesses. Compared to other financing options, bank loans are attractive because they tend to offer the lowest interest rates.

Unfortunately for most businesses, all the perks of traditional bank loans mean qualifying is very challenging. One of the biggest downsides of a conventional bank loan is that a personal guarantee or collateral is required.

To qualify for term loan or line of credit, you undergo a strict application and underwriting process. The application process is lengthy: it can take from a few weeks to several months. You have to collect and submit lots of paperwork, including financial documents proving your business history and creditworthiness. You may also encounter fees such as application fees and origination fees; in most cases, you pay the application fee regardless of the decision.

To qualify for most conventional bank loans, your business must have been open for at least two years. Lenders will look at your business credit score as well as run a check of your personal credit score. And while banks are the largest small business lenders, few small businesses qualify. According to Nav, about 72% of small business owners who apply get denied.

It’s worth mentioning that if a bank does decide to reject your loan application, they do provide some information about why. Some of the top reasons why business loan applications get denied are: lack of credit history or negative credit history, insufficient collateral, lack of current cash flow, and even your type of business and customer base. Because so many small business owners experience rejection by major banks, a large number of them turn to more forgiving, more convenient, alternative financing options.

Fundbox vs. Traditional Bank Loans

Traditional bank loans do offer many benefits such as predictable monthly payments and low-interest rates; however, they are very difficult to obtain. They have strict standards which are difficult to attain by a small business that is still trying to build good credit and business history.

Traditional bank loans are a great choice if you need a large amount of capital in a single lump sum. However, when it comes to fast business funds and lines of credit, alternative fintech companies like Fundbox are changing the way small businesses get access to capital.

With Fundbox, you can sign up in seconds, get a credit decision in just 3 minutes*, and if approved, get your funds transferred to your business bank account as soon as the next business day. You make payments in predictable, equal installments over the 12- or 24-week period. You always have a chance to see the exact amount you’ll need to pay, instead of having to calculate a shifting percentage. And if you repay early, you can even save, since we waive all remaining fees on early repayments.

Fundbox vs. Square Capital Loans and MCAs

Both Square Capital loans and Fundbox lines of credit offer financing options of up to $100,000. They’re also both good options if you don’t want financing that relies solely on your credit score. Fundbox offers lines of credit based on a holistic picture of your business performance, including information about your transactions and the value of your invoices. Square Capital determines your borrowing amount on your sales history and processing volume with Square.

Unlike Square Capital’s daily payments, Fundbox payments are weekly. Each week, you pay back part of the drawn amount plus a flat fee. Fundbox lines of credit are revolving, meaning that with each weekly repayment, the amount you paid (minus the fees) becomes available again. With Square Capital, there’s no incentive for early payments. With Fundbox, you can pay back the entire amount early, and get all the remaining fees waived. Repaying early can therefore save you a lot.

Fundbox could be a better choice for business owners seeking a short-term loan in smaller amounts. Fundbox makes it easier for people who want to avoid the dreaded debt spiral since the repayment plan is not daily as it is with Square Capital loans and MCA. Unlike MCAs, Fundbox doesn’t let you suffer under high daily retrieval rates. Your fees are flat, and the total fees you owe are divided evenly across your repayment period. With Fundbox, fees start at just 4.66% of the draw amount for 12-week repayment.

*Based on the median credit decision time for Fundbox customers.