Square already offers cash advances to small businesses, and believes its expansion into bank loans can bolster Square Capital’s appeal to borrowers and avoid some of the challenges other online lenders have faced, including worries about loan quality and market demand.
Square will offer the loans to small businesses that use its payment devices, with fees of around 10% to 16% of the amount borrowed. The loans will be paid back by Square taking a cut of each transaction, typically around 10%. Unlike a cash advance, which is open-ended, the loans must be repaid within 18 months and can be repaid early. The typical cash advance is repaid in nine months, Square says.
The loans, which will be originated by Utah’s Celtic Bank in partnership with Square, will be bundled together and sold to investors such as hedge funds and other asset managers.
Square made more than 70,000 cash advances for about USD400 million in 2015, with USD150 million coming in the fourth quarter.
The company doesn’t disclose its revenue from cash advances, which it includes as part of its software-and-data group. That revenue made up less than 5% of Square’s total net revenue of USD1.3 billion in 2015.
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