Square's Cash Advances to Merchants

After turning iPhones and iPads into points of sale, Square is looking for new ways to make profits and now is looking at cash advances.

The cash advances will be aimed at merchants and will be different from loans, according to the Re/Code. Instead, the cash advances will be based on a business owner's future sales and a fee, so Square gets a hefty lump sum at the start. Square is expected to be doing business as Square Capital.

Square Capital would hypothetically work like this: a business owner would be given a $7,300 cash advance but the merchant would be charged $1,022, or about 14 percent. In the end, the business owner would be responsible for repaying $8,322. However, the merchant would be given as much time as he or she needs to pay it off, according to Square Capital's email to business owners. Square's payment would be based on a 10 percent cut of the business's credit and debit card sales until the debt was repaid -- once the sales reach $83,220. 

The cash advance is aimed at business owners with either bad credit or ones unable to secure a bank loan. There's also no advantage to paying off the loan quickly since the APR rises if paid off in less than a year. The new product is considered "a pilot test" for Square Capital and comes along just as the company is deciding to raise more capital or move towards an initial public offering.

While some may see this product as a predator feeding off a company's sales, a cash advance with a 14 percent APR for someone with bad credit wouldn't normally be considered predatory. It could be what some business owners need.

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