Square Capital Review: Merchant Cash Advances by Another Name
If you’re a Square user who’s been offered a Square Capital loan, you might have a few questions.
Like, if it looks like a merchant cash advance, smells like a merchant cash advance, and operates like a merchant cash advance, is Square Capital’s business loan still a merchant cash advance?
And more importantly, do Square Capital’s loans have the same benefits and drawbacks as traditional merchant cash advances, or is there more to consider?
Get the answers in our review below.
Square Capital is best for businesses already using Square’s credit card reader that need a little cash flow
First things first: you don’t choose Square Capital—it chooses you.
To use Square Capital, you must actively use Square’s merchant services (it’s our pick for the best mobile credit card reader). If Square likes what it sees in you—or at least, in your credit card sales—it will extend you a loan offer on your Square dashboard. If you don’t have an offer there, you simply cannot get a Square loan. Not yet, anyway.
Square doesn’t reveal exactly how it determines your eligibility for a Square Capital offer, but it does look at the following from your Square history:
- Your processing volume
- How recently you’ve used Square
- Your ratio of new and returning customers
- The number of chargebacks you’ve had
- The growth of your business
- Your overall activity level and history
Notice you see nothing about credit scores, tax returns, or bank statements. That means that, unlike our top choices for the best business loans, you can get business loans through Square without great credit.
But getting an offer from Square Capital is just the first step of the funding process.
The Square Capital funding process
So Square puts a loan offer on your dashboard. Now what?
Your offer should show you how much you’ve been approved to borrow. You should even be able to choose various amounts (up to your maximum) and see corresponding rates, fees, and estimated repayment terms.
If you like what you see, you can choose to accept your loan offer. Square may ask you for some documents at this point—stuff to prove your identity and your business’s identity.
Once you’ve finished your application, Square Capital should officially approve your loan request in one to three days. After that, Square deposits your funds into your bank account within another one to three days.
What kind of funds, you ask?
- Flexible application requirements
- No required collateral
- Sales-based repayment
- Offers only for Square users
- High APRs
- Poor customer service
Square Capital’s small-business funding
Square Capital offers one type of financing. And while Square calls it a loan, we’ll let you in on a secret: it’s definitely a merchant cash advance (MCA).
Like any merchant cash advance, Square’s loan gives you a lump sum of cash up front, which you repay by giving Square a predetermined percentage of your daily debit card and credit card sales. Your repayment amount includes that up-front amount plus set fees (rather than interest).
You can repay your loan early—and Square doesn’t charge early repayment fees—but there’s not much benefit to doing so. Because this model uses preset fees rather than interest, paying your loan off in advance won’t save you money.
Square Capital's small-business loans
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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.
While Square Capital offers loans up to $100,000, the average loan is much lower—just $6,000.1
Square Capital fees and APR
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 . . .
Square Capital vs. competitors
Now you know about Square Capital—but how does it fare when compared to some of its most popular competitors?
Square Capital vs. Kabbage
Unlike Square Capital, Kabbage offers a line of credit rather than merchant cash financing. However, both Square and Kabbage use nontraditional loan applications. In Kabbage’s case, you connect your bank account or accounting software to your Kabbage account and Kabbage’s algorithm determines your creditworthiness.
Likewise, Kabbage also uses predetermined fees rather than interest. But unlike Square Capital’s percentage-based payments, Kabbage requires set monthly payments.
Both offer convenience and accessibility—and high APRs. It mostly comes down to what kind of repayment you prefer.
Square Capital vs. PayPal loans
Square Capital and PayPal Working Capital operate very similarly. Both offer merchant cash advances with set fees and percentage-based repayment through their payment processing services.
Of course, in PayPal’s case, your merchant cash advance gets repaid through the PayPal payments you accept, rather than your Square credit card transactions. But the process works pretty much the same way, and fees look comparable.
In this case, the better option depends on what kind of payments you get: if you use Square to accept most payments, you’ll obviously want Square Capital. But if you mostly use PayPal, PayPal Working Capital will work better.
Square Capital vs. merchant cash advance companies
You’ll find plenty of other merchant cash advance companies out there. These will use the same model, letting you repay your loan through your credit card sales.
Again, most of these companies will have similar benefits and similar drawbacks, although Square Capital may have lower fees.
But if you already use Square to accept payments, Square Capital will offer greater convenience. If you don’t use Square, then you’re not eligible for Square Capital anyway, so you might as well use a different merchant cash advance company.
Square Capital has loaned over $3 billion to small businesses.
FAQs about Square Capital
How can I make Square Capital give me an offer?
Put simply, you can’t. Asking nicely won’t help. But Square does promise to review your profile periodically, so if you ever become eligible, you will get an offer.
Until then, just keep using Square. The more you use it, the more likely you’ll become eligible for a Square Capital loan.
Can I get a second or third offer?
Yes, you can get multiple loans with Square Capital. Some customers report you’re most likely to get another offer when you’ve paid off about 60% to 80% of your current loan.
That being said, you’re not guaranteed to get another loan offer. Even if you’re a perfect loan customer, Square’s algorithm might decide that you don’t qualify anymore.
Take note—if you accept another offer while paying off your first loan, your second loan will pay off your first loan and give you the remaining balance. Keep that in mind as you look at an offer’s fees and rates.
How long does Square Capital’s approval process take?
After you accept an offer and upload any necessary documents, Square should approve your application in one to three days. After that, you should get funded in another one to three days. Altogether, the Square Capital process takes less than one week.
Does Square Capital require collateral?
Square Capital doesn’t ask for any kind of collateral for loans of $75,000 or less. With larger loans, Square will put a lien on your business assets.
Either way, Square Capital doesn’t require you to make a personal guarantee.
Will Square Capital affect my credit score?
The good news? Square Capital won’t affect your personal or business credit. Even if you apply and get denied, Square Capital has no negative effect on your credit score.
The bad news? Square Capital won’t affect your credit score. Even if you promptly pay off your loan, it won’t improve your personal credit score, and it can’t help with building business credit.
That’s because Square Capital doesn’t report to credit bureaus. And again, Square’s “loan” is just a glorified merchant cash advance. Those never get reported to credit bureaus.
So on the one hand, Square Capital can’t harm your credit; on the other hand, it can’t build your credit. Think of it as credit neutral.
Square Capital provides an ultra-convenient loan for businesses already using Square. From the simple application to the automatic repayment process, Square Capital makes it easy for Square customers to get valuable financing.
But that simplicity comes with the usual drawbacks of merchant cash advances—especially the high fees and high APR. And since Square Capital decides who it offers loan applications to, many businesses simply won’t have Square as a funding option.
If you’re one of the chosen, Square might offer a way to get your funding. Just make sure you understand your fees and repayment structure.
Have you been one of the lucky few to be offered a Square Capital loan? Tell us about your experience in the comments!
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