How big could Square’s lending business be?


Square‘s (NYSE: SQ) the core business is making credit and debit card transactions easier for small businesses, but the business isn’t just limited to that. A relatively new part of Square’s small business ecosystem is its Square Capital lending platform, which has grown 68% in the past year alone and may only scratch the surface of its potential. .

What is Square Capital?

Square Capital is Square’s small business lending platform that provides loans ranging from $ 500 to $ 100,000.

Square Capital allows merchants to borrow money based on their sales. Image source: Square.

Square determines eligibility primarily from its customers’ sales history with Square’s payment processing platform. If a Square customer is eligible for a loan, the business alerts the customer via email, as well as a notification on their Square dashboard.

Instead of having to remember to make monthly loan payments, Square automatically takes a percentage of the company’s daily card sales to pay off the loan. Square charges a flat rate for its loans. For example, the terms of a $ 10,000 loan may require the borrower to pay Square 13% of their card sales until they pay a total of $ 11,000.

Why does it work so well?

Square Capital has grown so rapidly since its inception in 2014, as it solves a major problem for small businesses: access to reasonably priced capital to facilitate growth. Square allows borrowers to apply quickly, get their funds in just one business day, and pay off loans easily with no hidden fees.

In addition to borrowing from friends and family, or using high-interest credit cards, the go-to option for small businesses has been to obtain a bank loan, which can be a complicated and difficult process. In fact, Square estimates that over 40% of small businesses that consider getting a loan don’t even apply for a loan, and about a quarter of those that do end up being turned down.

Since Square’s lending process is based on the payment processing activity of its customers, the company knows how much revenue its potential borrowers are generating and can therefore make the loan decision process much simpler than that of. a bank.

At the recent Money 20/20 conference in Las Vegas, Square Capital’s head of data science, Thomson Nguyen, said, “Payments from our 2 million small businesses give us a unique, real-time snapshot of the health and the future trajectory of a company “. In other words, data from Square’s payment processing activity tells the business whether a particular business is creditworthy or is likely to default.

How tall could he reach?

I mentioned that Square Capital made $ 1.8 billion in loans. Sounds like a lot, and it is, given how new the business is. However, this is only a fraction of Square’s addressable market.

Specifically, 141,000 Square sellers have taken advantage of the loan program. And those who do are repeat customers. Square Capital’s average loan is $ 6,000, and when you divide $ 1.8 billion by 141,000 customers, that should mean the average borrower has taken out almost $ 12,800 in loans. In other words, this implies that the average Square Capital borrower has taken more than two loans since the platform’s inception.

Not only does Square Capital have a remarkable number of loyal customers, but the 141,000 borrowers represent just 7% of Square’s payment processing customers, which translates into plenty of growth opportunities.

And finally, keep in mind that this only includes Square running clients. As I wrote before, Square has an incredible market opportunity as two-thirds of businesses around the world still don’t accept card payments. Square currently has around 2 million customers, and there are approximately 28 million small businesses in the United States alone.

In fact, the lending program is going so well that Square recently applied for a license to open its own bank, which would allow it to lend directly to its customers and cut out the middleman. (Square Capital is currently lending money through a partner bank.)

So while I hesitate to predict an actual lending volume that Square Capital could achieve in the years to come, it’s fair to say that the platform could achieve many bigger than it is now.

Square is more than a payment processor

Square Capital could certainly become a major source of revenue for the business, in addition to the flourishing payment processing business. It’s also important to mention that there are several other relatively new business endeavors that Square is engaged in, many of which also have a lot of potential.

To name a few, Square’s Caviar food delivery platform is still in its infancy, as is the peer-to-peer payment platform Square Cash, which recently rolled out a card. physical with which users can spend their money.

At the end of the day, Square is more than those little square-shaped card readers and payment terminals on the iPad. It creates a business ecosystem for small businesses and its solutions spread rapidly.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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