Square’s Future Rests With Its Small Business Loan Program

Tod Wilson is largely what you’d expect from a small business owner. As the proprietor of Mr. Tod’s Pie Factory in New Jersey, he wants to grow his business and eventually take it nationwide. When I interviewed him in 2015, he had plans to open additional locations both in New Jersey and New York and claimed it was because of Square.

It’s been more than a year since the commerce company went public and its stock is on the rise. Square began trading at $11.20 after pricing shares at $9, and now it’s up nearly 80 percent. Investors have come around to see where the company is going, and a large part of that is spurred by Square Capital, the program set up in 2014 to provide small business loans. It competes alongside PayPal’s Working Capital program.

When Square started, it focused on small businesses, of which there are nearly 28 million in the United States. The company has called itself an “operating system for small businesses,” releasing a myriad of tools and services to help founders turn dreams into reality without breaking the bank. From its card reader to Point of Sale solution, and a bevy of software offerings, Square appeared to have an answer for everything a small business might need to execute a transaction. But this wasn’t going to be enough for investors, let alone shareholders from the public market — the company needed to show that it can move upmarket and re-imagine the commerce world.

Square’s Point of Sale solution. Photo credit: Square

Since going public, Square has looked beyond solutions that work for freelancers, new business owners, and freelancers. It has launched a suite of APIs called Build with Square that enables developers to tap into the payment service and bring it into third-party solutions.

“We’ve found that as merchants grow, or you move more up market, there’s a need for customization,” Carl Perry, Square’s general manager, once told me. “These companies will either work with existing developers to build apps or if they’re larger merchants, will have their own IT shop.”

But while these solutions enable developers personalized control over what they like, how does this impact Square’s existing customers like Mr. Tod’s Pie Factor, who may need a little more oomph to get going? That’s Square Capital and to this day, more than $1 billion has been doled out in loans to small businesses to help them expand and make critical updates. More money has been dispensed every year too — in 2015, $400 million was provided, but the next year saw nearly a 100 percent increase to $798 million.

The amount of business loans dispensed through Square Capital from 2015 to Q1 2017. Click to expand.

Since it’s gone public, Square has boasted that it has maintained approximately a 4 percent loss rate, so that’s one possible indication of the program’s success. But what’s interesting is that after two years, not only is the amount of loans being dispensed slowed in growth quarter-over-quarter, but the number of customers taking a loan was flat between Q4 FY2016 and Q1 FY2017.

Could Square have hit a saturation point, or perhaps reached a level where the intrigue and enthusiasm over its capital program dried out? We’ll have to wait until the company releases its second quarter earnings later this summer. But it’s doubtful that people have grown tired of it, since there’s plenty of opportunity not only in the United States, but also in the other markets Square operates in, such as Canada, Japan, Australia, and the United Kingdom.

The amount of customers by quarter that received loans through Square Capital from 2015 to Q1 2017. Click to expand.

And as Square props up its customers with business loans, it’s reportedly also looking to expand the program to now benefit its customers’ customers, powering financing services so the end users/consumers are able to make purchases. In a way, Square wants to manage the entire business lifecycle, starting from creating a business, helping to expand, and empowering consumers to make purchases that will in turn benefit the business, and consequentially Square. Got all that?

In a way, what Square is doing ties together because it’s attacking the commerce problem and applying its simple commerce philosophy from the business and consumer side. We’ve already looked at the former, but with the latter, this is where Square Cash comes in and the new debit card the company is making available. The debit card sounds cool and will likely appeal to those who see no need for a credit card, but also enjoy the simplistic feel of Square.

Should Square Capital be the foundation for consumer financing, the company’s existing offerings could change significantly for the shopper. Square’s executive for the program Jackie Reses has told The Wall Street Journal that the company will not be providing loans for high-end goods like cars or mortages, so likely smaller goods and services that fit its current customer base.

Borrowers will receive a 9.99% annual percentage rate for loans ranging between $250 and $10,000. The company said that the program is available in just six states right now, specifically California, Colorado, Florida, New Jersey, New York, and Virginia. There are plans to expand nationwide in the future.

How Square approaches its long-term investment in Capital will likely be the gauge investors pay attention to in the foreseeable future. It’s also probably a good metric to analyze what’s next in the future for the company. After all, as Square moves further away from being a startup to a significant financial institution, it wants to elevate its business customers, many, like Mr. Tod’s, have become evangelical about the company. It’s also looking to transform small businesses into established ones and empower consumers as well.

Image credit: Square

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