If you’re a small business owner using the popular Square point-of-sale system to process transactions, you might have been offered a Square loan at some point. And, if you’re like me the first time I received this offer, you probably have some questions such as:
- Is this a legitimate offer?
- Is the loan fee a fair rate?
- Are Square loans a scam?
- How did Square calculate my offer, fee, and repayment plan?
- What are the risks involved with accepting a Square loan offer?
- Will a Square loan affect my credit score?
My business is less than two years old. Well… let me revise that statement. My LLC is technically four years old, but I didn’t start treating it as a full-time career until the spring of 2022. I’m right in the middle of the growth, investment, and experimentation phase as I learn more about my fan base, demographics, prime locations, booth setup, marketing strategies, types of events that best suit my products, etc.
Unfortunately, after leaving my full-time job in early 2021 and then jumping between freelance writing gigs while working to build my own business, my local bank wasn’t willing to extend my credit or offer me a loan due to my unstable finances even though my credit score was decent.
How can an entrepreneur build a business without startup capital? As an author trying to distribute my books to new readers, how could I order copies of my novels and pay vendor fees to set up a booth at festivals, markets, and cons when I was barely scraping by? I was caught in a vicious cycle of needing money in order to make money right from the start.
So, when Square made me a loan offer last year, I was sorely tempted to take it. But I’m a cautious entrepreneur, and I wanted to do some research first to make sure I wasn’t being scammed. In this article, I’ll share my experience after utilizing Square loans three times as of the date this article was published.
How Do Square Loans Work?
Square will automatically analyze your business stats periodically and determine if you are eligible to receive a loan. If you are, you’ll receive a notification in your dashboard showing you the maximum amount you’ve been approved to receive.
(It’s important to note that Square will be the one to extend an offer on their own terms when they’ve determined that you’re eligible. You can’t submit a request and expect to receive an offer, no matter how nicely you ask.)
Square considers several factors to determine your loan eligibility, including:
- Annual Revenue: Does your business bring in at least $10,000 a year?
- Payment Frequency: How consistently do you process sales? Daily? Weekly? Monthly?
- Consumer Base: Do you have a healthy balance of new AND repeat customers?
- Payment Disputes: How many customers have filed payment disputes?
- Overall Health of Your Business: What insights does your Square dashboard reveal? Is your business growing? Have you accepted Square loans (and paid them off) before?
Ultimately, Square is checking to see how well you run your business and whether they feel confident that you’ll be able to pay off the loan in a timely manner.
When you receive a loan offer from Square, you can decide if you want to accept the full amount or request a smaller amount instead. Using a slider tool, you’ll be able to see how the stats change as far as repayment percentage, fees, etc.
Square uses a fixed fee system, which means that you’ll pay a flat fee based on the amount you requested. No need to worry about accruing extra interest over time — you’ll already know exactly how much that fee is going to cost.
To repay your loan, Square will take a percentage of your daily credit card sales every time you process a card transaction. (Again, this percentage varies depending on the size of the loan.) On days when your sales are strong, you’ll pay off more of your loan. On days when you don’t have any sales, you don’t have to pay anything.
There are minimum payment thresholds you must reach every 60 days, and you can schedule additional payments if necessary. In the event that you fail to meet the minimum 60-day payment, Square can automatically deduct the remaining amount to reach that threshold from your linked bank account, so it’s important to pay attention if you’re concerned about hitting the minimum.
You can pay off your loan early if your sales are good. However, since you paid a flat fee for the loan, there’s no financial benefit to paying the loan early except to get it over with and stop losing a percentage of your card sales.
Square can offer you another loan even if you’re still paying off an outstanding balance. However, the new loan will be used to pay off the initial one first, and then you’ll receive the remaining amount, so if you choose this option, understand that you won’t be getting the full amount of the next loan deposited into your account.
Are Square Loans a Scam?
No. Square loans are NOT a scam. In my experience, after accepting the loan offer, I received the funds via direct deposit to my bank account within one or two business days.
I did have some trouble verifying my bank information when I attempted to receive the first loan. However, that was due to a problem with my bank, which claimed that due to security reasons, they couldn’t provide a statement with the full account number that Square said they needed. And, of course, Square told me that they absolutely had to have that information and couldn’t verify my account without it (even though they already had my direct deposit information since I’d been using their services for my business).
It was a headache, but after multiple phone calls between Square reps and my bank, it was finally resolved. Once the account was verified, I haven’t had any other issues getting loans deposited from Square.
Will Accepting a Square Loan Impact My Credit Score?
According to Square’s official FAQ page, receiving a loan will NOT affect your credit score. This means that it will not harm your score for accepting, nor will it improve your score when you pay it off.
Square also claims that they do not use your credit score during their initial assessment to determine whether you qualify for a loan.
From my own personal experience, I did not see any fluctuation in my credit score the first two times I received a Square loan. I did see a slight drop in my score right after taking the third and largest loan… however, that doesn’t necessarily mean there was a correlation, as there were other financial factors in play. I’m willing to give Square the benefit of the doubt.
Pros & Cons
As with any loan, there are pros and cons that come with borrowing money for your small business. Based on my personal experience with Square loans, here’s a breakdown of the good and the bad:
Square loans can provide short-term investments when banks refuse to take a chance on new entrepreneurs. As I mentioned at the start of this article, my personal bank wasn’t willing to invest in me because I couldn’t provide documentation of my annual revenue (due to the fact that I hadn’t even been running my business for a full year). Square didn’t care about my credit score or the revenue I was earning from freelance work on the side — they were able to monitor my weekly sales to see that my business was growing and I would be able to repay the loan.
There’s no ongoing interest, processing fees, or prepayment penalties. I like being able to see exactly what my fixed fee will be so I know how much I will be paying in the end. No surprises.
You’re prequalified and have an easy application process to get the funds quickly. Well… theoretically. My issues with the first loan were because of my bank’s ridiculous security measures, not because of Square.
Receive anywhere from $300 to $250,000. Square will automatically determine how much you are eligible to get. You don’t have to accept the full amount — you can determine how much you need and play around with the options to see your repayment fee and what percentage of your credit card sales will be taken from your transactions.
Your repayment plan fluctuates based on whether your sales are strong or weak. It really helps knowing that when your sales aren’t good, you’ll pay only a little bit. That being said… this point also lands on the con list because you can’t predict your payments.
You can’t get a Square loan unless you’re an existing customer who has been using Square’s POS system for a while. If you’re not a Square customer, or if you’re brand new to the platform and haven’t established a history of sales yet, you won’t qualify. You also can’t ask for a loan — Square will offer it (or not) on their terms, not yours.
No long-term loan options available. Square loans need to be repaid within 18 months, and paying only the bare minimum will mean that you’ll still owe 50% of the loan by the end of the term. Depending on how much you received, that could potentially put your small business in financial jeopardy.
Square will keep taking payments even if you’ve met the minimum 60-day threshold amount. On the one hand, this helps make sure you pay the loan back in time and don’t end up with a big balance at the end of the period. But on the other, sometimes it would be nice to catch a break and build up your savings before the next 60-day threshold. That’s not possible since you’ll pay on every single card transaction until the loan is repaid.
The fixed fee isn’t a horrible interest rate… but it’s also not great. I always make sure that I do the math to figure out the percentage of the fee based on the amount of the loan, and then I did some online digging to make sure I wasn’t getting scammed. Based on my credit score, which fell into the “good” range, I should have gotten a better rate. But remember that Square doesn’t factor your credit score into their analysis. The percentage of my fixed fee compared to my total loan amount could have been better, but it also could have been a lot worse.
Losing a percentage of your card sales on every transaction can hurt more than you realize. How big of a chunk Square reclaims depends on the terms of your loan. For my first loan, Square recouped about 15% of each card sale. When I took my second loan, I opted for a smaller amount than Square offered, and my repayment percentage was only 7.5% of my card sales. But for my most recent loan, which was the largest, Square takes a 20% slice. Depending on how many card sales I do at an event compared to cash sales, I can end up bringing home a lot less than I thought after looking at the gross sales in my dashboard, especially because I also set up Square to automatically pull various amounts into different savings accounts for sales tax, personal savings, future vendor fees, etc. That can add up VERY fast if a majority of customers are paying with credit cards.
There’s no way to predict your repayment plan. Even if you have a pretty good idea of how much you expect to make in busy months versus slow months, there’s really no predictability because it’s not just based on your revenue — it also depends on how your customers are paying. That can result in a lot of fluctuation on a day-by-day basis, so if you’re someone who likes plans and stability, that could be an issue for you.
Final Thoughts on Square Loans for Small Businesses
In a perfect world, my business would be sustainable enough to cover all of my expenses without the need to borrow money (and pay extra fees to get it).
But this is not a perfect world, and for a new business trying to establish a foothold in the wake of a pandemic that led to global inflation, small loans were necessary. Square loans have been excellent for me in a pinch because they’re easy to get, easy to repay (I don’t have to remember to send payments since they’re taken automatically with credit card transactions), and there aren’t any hidden fees or extra interest accrued during my slow time when I’m not paying as much.
I’ve used Square loans to invest in inventory, cover business expenses, and pay vendor fees so I could lock down future events to ensure incoming revenue.
However, the interest rate (even though it’s a fixed fee) could definitely be better, and losing a percentage of my daily card sales isn’t always convenient since I have no control over how my customers are paying. There are times when the amount I took home was much less than I’d expected after an event, which can have an impact on paying bills, committing to events, stocking up on inventory, and more.
My ultimate goal is to reach a point where I don’t need to accept any loans. For now, Square has made it possible for me to grow my business, and I’m grateful for that. I’ve spoken with local entrepreneur friends who have also had overall positive experiences with Square loans.
A loan from Square might not be perfect, but it’s helped my small business as well as others.
I'm an award-winning fantasy author, artist, and photographer from La Porte, Indiana. My poetry, short fiction, and memoir works have been featured in various anthologies and journals since 2005, and several of my poems are available in the Indiana Poetry Archives. The first three novels in my Chronicles of Avilésor: War of the Realms series have received awards from Literary Titan.
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