What is a merchant cash advance?
A merchant cash advance is when you buy an agreed upon amount of money, and pay it back with a portion of your credit and debit card sales. It is different from a loan because there is generally no set time frame for repayment and no interest rate. Instead, you'll repay a pre-determined amount that includes the money you were advanced plus a fee.What is Square Capital?
Square Capital is Square’s business funding program. In order to apply for Square Capital, you must process payments with the company or be eligible through one of Square's partnerships, such as Upserve. If you are already a Square client, your eligibility is based on your history with the company and how much you process in credit and debit transactions. Not a client but considering Square? Check our Square review and profile. If you're eligible, your options will be specific to what Square has assessed for your business. Offers will be shown in your merchant dashboard, and will include the amount of money you can borrow, what you will owe back, and what percentage of your credit and debit card sales would be extracted until your cash advance is repaid. If you select an option to be submitted for approval, you cannot change the amount and have 3 days from the initial request to cancel. If you are approved, funds are in your business account by the next business day. Since the funding happens fast, remember to take some time to consider the costs that come with it before choosing an option.Eligibility
Square provides rough guidelines for businesses to determine eligibility. In general, you must:- Process $10,000 or more per year in credit cards
- Have a history with Square
- Have a "healthy" business
Pros, Cons, and Other Options
“Buy now, pay later!” Those baited words usually raise a blatant red rip-off flag. You know the provider is getting the better end of the deal, and that you will be on the hook until they get it. It might not be the ideal offer, but is it worth the cost? Here’s a quick look at the pros and cons:| The Pros | The Cons |
| Easier eligibility | Potentially more expensive than traditional loans |
| Faster application and funding | Less control over payback |
| No collateral necessary | Very often you owe no matter what happens to your business |
How does Square Capital compare to a loan?
No one likes number crunching, so we did the grunt work for you. While the offers that Square gives your business will be specific to you, there are example offers on Square’s website. We will do the math with one of these examples and you can follow along with your personalized offer. The example: Square says you can borrow $7,000 and pay back $8,410. You will repay it by giving Square 9% of your card sales until the fixed amount is paid in full. For those who just want the bottom line: Using this example offer and an average APR for a microloan, if you think you could pay that money back in less than 3 ½ years then you would probably benefit from taking out a traditional loan instead. If you could pay the loan back in a year or less, you could save over $1,000 compared to this Square Capital example. Keep in mind that merchant cash advances don’t allow you to choose how quickly you repay, while traditional loans have more flexibility on that. The Square Capital FAQ also includes a note that most advances must be repaid within 18 months of disbursement.Square Capital in terms of interest
Technically, merchant cash advances (including Square Capital) don’t have interest. But it’s easier to compare if we put the costs in terms of interest. Let’s see… $8,410 - $7,000 = $1,410 Then… $1,410 is a little over 20% of $7,000 ($1,410/$7,000 = .2014… multiply by 100 = 20.14%) So, that means your interest rate is 20% right? Wrong, but that is already high. It means that you’ll pay back 20% more than you borrowed. What it translates to as an APR depends on the timeframe for paying it back. According to payments news source Digital Transactions, Square anticipates the average advance to be repaid within 10 months. The shorter the payback time, the higher the APR. If the cash advance is repaid in 1 year, your interest rate on this example advance would be 35% with monthly payments of $700. Remember that the cash advance company (in this case Square) decides what percentage of your sales will go toward repayment, and that will dictate your monthly payment and ultimately your “interest rate.”Traditional Loans and Interest
When you are paying interest on a traditional loan, the amount will become less and less as you pay off the loan. This means a loan of $7,000 with 20% APR would actually cost you only $781.30 if paid off in a year! Your payments would be about $648.44 per month and you would save $628.70 by doing a 20% APR loan instead of the example cash advance. You would save even more if you paid it faster. You can calculate this for yourself using this APR calculator tool. (Just make sure you set all the fees to $0.) But wait, maybe $628.70 per month is too much and you need more time to pay the loan. Would that mean that Square Capital is cheaper if you needed more than a year? As long as you paid the loan within 1 year and 9 months, you would still be saving money and that is with an APR that is almost twice what it should be! According to the Small Business Administration, even when taking out microloans (under $50,000) the APR ranges from 8-13%. If you are interested in a small business loan ($30,000 or higher) the interest rate drops to 5.75%-8.25%.Square Capital Vs. a Loan
If a microloan has an APR between 8-13%, then let’s say your $7,000 loan has an average APR of 10.5%. How long of a repayment term would it take for Square Capital to be a better option? And, how much could you save if you paid the loan within a year? If you could pay the loan back in 3 ½ years or sooner, you would save money by taking the loan. At 3 ½ years, your average monthly payment would be $199.88. If your business brings in $2,220.89 or more in card sales a month, you would be paying this amount with Square Capital anyway. (Remember that the offer would extract 9% of your daily card sales.) The difference is that if you were able to pay more than $199.88 every month you would save money with the loan, but how much you pay back to Square Capital never changes. If you paid the 10.5% APR loan back in a year with a monthly payment of $617.04, the loan would only cost you $404.48. Which means you would be saving over $1,000 compared to the cost of Square Capital’s $1,410 mark up! Chances are, if you are borrowing $7,000 for your business, saving a grand is a considerable help. The amount of interest on a loan typically goes down when you borrow higher amounts as well, so these numbers are worth considering even if you are looking to borrow more. If you are looking to borrow less, remember that there are other options for raising funds. Square Capital’s 35% APR on the example above is high, but some cash advance options are even higher. The Takeaway: As far as merchant cash advances go, Square Capital is likely among the lower cost options. But merchant cash advances as a whole are usually more expensive than many other funding options like traditional small business loans. It’s usually in your best interest to avoid merchant cash advances. Be careful you don’t click on an offer that ends up being a quick, easy, expensive mistake.
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
