Regardless, you have up to 18 months to pay off your loan. Square Capital says it sets your repayment rate so you should automatically pay off your loan within one year. But if that doesn’t happen, at 18 months your loan will be due in full.
Note that Square Capital doesn’t advertise its retrieval rates (the percentage it takes from your credit card sales), but you will be able to see those rates in your loan offer.
You might like this merchant cash advance model because it offers great convenience: you don’t have to worry about making payments since Square automatically takes them from the sales you already make. And if you have slow sales one month, you’ll have lower payments thanks to the percentage-based repayment plan.
But you might dislike this model because, like pretty much all merchant cash advance companies, Square has been accused of charging high fees and trying to hide just how high they really are.
In fact, let’s take a closer look at those fees.
Unlike traditional term loans, which charge interest on your loan amount, Square Capital charges a set fee on your loan. This fee won’t change over time; whether you pay off your loan in one day or one year, you’ll pay the exact same fee.
Square Capital doesn’t publish its fee rates, but Fortune reports those fees range from 10% to 16% of the loan amount.1 So a $10,000 loan could have fees ranging from $1,000 to $1,600.
Those rates are actually much lower than the fees of many merchant cash advance companies; MCAs usually have a factor rate of 1.2 to 1.5, or 20% to 50% of the loan. But the APR (annual percentage rate) on a Square loan will probably still come out higher than the APR on a traditional loan.
That’s because APR describes the cost of a loan over a year. Traditional term loans have multi-year terms, so interest and fees get spread over those lengthy terms. As a result, the yearly cost is cheaper. But for a Square Capital loan, those fees don’t get spread out as much with the loan’s shorter term, making the effective APR higher.
That doesn’t necessarily mean you shouldn’t use Square Capital. After all, it has plenty of advantages that can make up for the APR. You simply need to know how it compares to your other options.
Speaking of which . . .