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Square “Loans”: Pros and Cons

by The Hairstory Team|27 August, 2019|Blog / Community / 

Financial Perspective from Eli Halliwell, Hairstory CEO

Many Hairstory hairdressers use Square both to process credit card transactions and to schedule clients’ visits. We like to recommend it as generally affordable and straightforward – especially in salons with multiple independent hairdressers working together.

Is a Square Loan really a loan? 

Many of you who use Square have been offered a Square Capital “Loan.” We put “loan” in quotes because it is not actually a loan at all. It is a merchant cash advance. What does this mean? When Square sees that you have a regular flow of customers, it offers you the chance to “borrow” cash upfront before customers pay you because they believe your sales will allow them to recoup it without waiting for you to earn it and pay them back – plus a set fee rather than interest. 

So here’s the question we’re asked most often: Are Square Loans a good deal? Should I take one out? We aren’t in the business of giving financial advice, but we are happy to share thoughts on how you, as hairdressers, should evaluate these “loans.”

How do I get a Square Loan? 

Not everyone is offered a Square Loan. To qualify, you must actively use Square Merchant Services. If Square thinks you are a safe bet based on key data points in your transactions, a loan offer will pop up in your dashboard. If they don’t, you simply won’t get the offer, and there is no way to apply for one. You don’t pick Square Loans, they pick you.

We put “loan” in quotes because it is not actually a loan at all. It is a merchant cash advance.

Will Square Loans impact my credit rating? 

Because a Square Loan is a merchant cash advance, it is completely unrelated to your credit. Square doesn’t run credit checks when it offers you a loan, and accepting it will have no impact on your credit rating – a huge plus for people with a history of credit challenges.

Are Square Loans a good deal?

It is slightly tricky to evaluate Square Loans relative to traditional loans. But unlike traditional term loans, which charge interest on the loan amount, Square Capital charges a set fee whether you pay off your loan in one day, one year, or the maximum term of 18 months. 

Square Capital doesn’t publish its fee rates, but they reportedly range from 10% to 16% of the loan amount (a $10,000 loan could have fees ranging from $1,000 to $1,600). If you spread the fees across the full 18 months, Square Loan fees equate to approximately a 6.7% to 10.7% APR, which is slightly higher than your typical interest rate for a small business loan. You are allowed to pre-pay your Square Loan, but if you do so you may be jacking up your effective APR - there is no benefit or penalty to pre-payment.

How do Square Loans work? 

After you are approved for a Square Loan, you generally receive the money in your account within a few business days. But don’t throw a party – you have to pay this money back! How? Square will remove a predetermined share of your credit card receipts each month until they have been repaid both the principal and fees. Because your sales may vary month to month, so will the amounts of your payments. The good news is that your payments are aligned with your cash flow and you don’t have to remember to send a check. The bad news is that Square will take the money first, without your permission.

The good news is that your payments are aligned with your cash flow and you don’t have to remember to send a check. The bad news is that Square will take the money first, without your permission.

What’s the bottom line? 

The bottom line: Square Loans seem like a pretty good deal, and a fair alternative to a traditional loan, particularly for a population who find it difficult to get business credit: Hairdressers. Still, you need to be cautious when entering a contract like this. A Square Loan is only worth it if: you have the cash flow to back it up; your credit history prevents borrowing through traditional avenues, and you value ease, convenience, and a short-term commitment over potentially higher fees. Square Capital offers plenty of advantages that can make up for the APR. But before you press that “apply now” button, know how it compares to your other options.



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by The Hairstory TeamThe Hairstory Team

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