Square adds cash advances – small business lending continues data driven movement

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I’ve been a big fan of Square and its ability to enable small business to accept credit cards anywhere for 2.75%.  It’s a convenience and cash flow value add that enables small business to thrive without worrying about collecting money, cashing cheques (or worse, bounced cheques), depositing cash, etc.

And I am not surprised that Square has joined peer-to-peer lending models to focus on small business lending.  Why not?  If you look at the following companies that are active in this space, funded by private equity, venture capital, and non bank investors, the list keeps growing.

Just to recap, here are a few to keep an eye on:

  • Lending Club is expanding to small-business customers looking to borrow between $15,000 and $100,000.  The Lending Club isn’t a bank that lends money but rather an Internet service that connects borrowers with people who are willing to lend them money.
  • Kabbage links loan to a business B2B account (part of the condition to get the money) and they take money out of the client’s Paypal or other B2B account  based on the agreement signed with them
  • Biz2Credit has funded over $1bn in loans to 11,000 businesses.  They can takes one loan application and sends to thousands of lenders who use filters to determine eligibility .
  • Dealstruck builds on the ideas of Kabbage and OnDeck by making loans directly while also acting as a marketplace for peer-to-business loans (or, as the case may be, hedge fund-to-business loans)

Square unveiled Square Capital to offer quick cash advances to the small merchants who use Square’s flagship product, a credit card reader that plugs in to iPhones and iPads.  Square has built enough data through their card reader product that they can now offer this service.  Square recoups the advance plus an additional flat fee, by taking a percentage of the sales that the merchants subsequently process through its credit card payment network.

As more companies offer alternative lending models to small business, Trade Financing Matters suggests to keep an eye on:

  1. Not if they will succeed, but how they use data, the speed they provide a yes or no, and the way they manage their risk.
  2. What risk mitigation techniques are used?  How do they use data, cash dominion, insurance, etc. to manage risk of non payment.
  3. How are non banks playing a role?  Vendors do not have balance sheet and must access third parties not encumbered by regulatory or compliance issues like banks.
  4. How will banks respond to this threat of disintermediation.  Providing cash advances, accessing the peer to peer lending market, and using other vehicles may not seem like much today, but banks make big money off overdraft accounts for small business.  If these are impacted, that’s another bank product that will experience challenging times.

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