Square's (NYSE:SQ) primary business is facilitating credit and debit card transactions for small businesses, but there's a lot more to the company than that. One relatively new component of Square's small-business ecosystem is its Square Capital lending platform, which has grown by 68% over the past year alone and may be just scratching the surface of its potential.
What is Square Capital?
Square Capital is Square's small-business lending platform that makes loans in amounts ranging from $500 to $100,000.
Square determines eligibility primarily from its customers' sales history with Square's payment-processing platform. If a Square customer is eligible for a loan, the company alerts the customer by email, as well as through a notification on his or her Square dashboard.
Instead of having to remember to make monthly loan payments, Square automatically takes a percentage of the business' daily card sales to repay the loan. Square charges a flat rate for its loans -- for example, the terms for a $10,000 loan might require the borrower to pay Square 13% of its card sales until it pays a total of $11,000.
Why is it working so well?
Square Capital has grown so rapidly since it was founded in 2014 because it solves a major problem for small businesses -- access to reasonably priced capital to facilitate growth. Square allows borrowers to apply quickly, get their funds in as little as one business day, and pay back their loans easily, with no hidden costs.
Aside from borrowing from friends and family, or using high-interest credit cards, the go-to option for small businesses has been obtaining a bank loan, which can be a complicated and difficult process. In fact, Square estimates that more than 40% of small businesses that look into obtaining a loan don't even apply, and roughly one-fourth of those who do end up getting declined.
Since Square's lending process is based on its customers' payment processing activity, the company knows how much revenue their prospective borrowers are generating, and therefore can make the lending decision process far simpler than that of a bank.
At the recent Money 20/20 conference in Las Vegas, Square Capital's head of data science, Thomson Nguyen, said that "payments from our 2 million small businesses give us a unique real-time insight into a business' health and future trajectory." In other words, the data that comes from Square's payment-processing business tells the company whether a particular business is creditworthy or if they're likely to default.
How big could it get?
I mentioned that Square Capital has made $1.8 billion in loans. This sounds like a lot, and it is, considering how new the venture is. However, this is just a fraction of Square's addressable market.
Specifically, 141,000 of Square's sellers have taken advantage of the lending program. And those who do are repeat customers. Square Capital's average loan is $6,000, and when you divide $1.8 billion by 141,000 customers, this should that the average borrower has taken nearly $12,800 in loans. In other words, this implies that the average Square Capital borrower has taken more than two loans since the platform's inception.
Not only does Square Capital have a remarkable amount of repeat customers, but the 141,000 borrowers represent only 7% of Square's payment-processing clients, which translates to lots of opportunity to expand.
And finally, keep in mind that this just includes Square's current customers. As I've written before, Square has an amazing market opportunity, as two-thirds of businesses worldwide still don't accept card payments. Square currently has about 2 million customers, and there are about 28 million small businesses in the United States alone.
In fact, the lending program is going so well that Square recently applied for a license to open its own bank, which would enable it to lend directly to its customers and cut out the middleman. (Square Capital currently lends money through a partner bank.)
So while I'm hesitant to predict an actual loan volume that Square Capital could achieve in the coming years, it's fair to say that the platform could get much bigger than it is now.
Square is much more than a payment-processing company
Square Capital could certainly evolve into a major revenue stream for the company, in addition to the thriving payment-processing business. It's also important to mention that there are several other relatively new business activities that Square is engaged in, many of which also have lots of potential.
Just to name a couple, Square's Caviar food-delivery platform is still in the early stages, as is the Square Cash peer-to-peer payments platform, which recently rolled out a physical card with which users can spend their money.
The bottom line is that Square is more than just those cool little square-shaped card readers and iPad-based payment terminals. It is creating a commerce ecosystem for small businesses, and its solutions are catching on fast.