Square’s New Lending Push

Square is expanding Square Capital to include bank loans to small businesses that use its payments services, according to The Wall Street Journal. Different from the cash advances offered today, loans will carry a maximum term of 18 months but can be repaid sooner. These loans, like other online lending products, will be packaged and sold to investors like hedge funds. The bank in the background is Utah’s Celtic Bank.

Like its cash advances, loan repayment will be made by Square taking a percent of each transaction, which it says will average 10 percent per transaction. The range of fees is between 10 percent and 16 percent.

Square Capital’s chief, Jacqueline Reses, told WSJ that Square will hold some portion of the loans as a way to show investors that it has “skin in the game.” Reses said that the new service fills a gap in the SMB lending market for “simple, fair and transparent” lending products.

This comes at a time in which market conditions and loan performance have thrown a bit of shade on the overall online lending market. In order to expand the portfolio of potential borrowers, many online lenders have begun extending loans to more risky borrowers, a potential threat to the viability of the current online lending model.

Square says that it uses as many as 2,000 data points to assess the creditworthiness of a small business, including details that help it assess the health of those businesses, including sales history, which blunts its risk of extending credit to a business that is not able to repay the loan.