Cash Advances: A New Way to Fund Small Businesses

June 9, 2014

Building a small business is hard work. Even with a great idea and a stellar work ethic, multiple hurdles will come up along the way. Some of those challenges, like how to organize your business or obtain the proper real estate for your business can be made easier through the assistance of a licensed attorney. But there is one other big hurdle: funding. For years, entrepreneurs have had to negotiate the often difficult landscape of obtaining loans or finding private investors to keep their doors open in those early days before the business makes a profit. In order to expand, small business owners have faced the same hurdles. But now there may be a new, easier way to get needing funding more quickly: a cash advance.

The term cash advance sometimes has a bad connotation, because it is usually associated with cash advances from credit cards. This is a system where an individual uses his or her credit card at an ATM machine to receive cash directly, rather than using the credit card directly at a merchant. This sort of transaction can carry very high transaction costs–interest without a grace period plus associated ATM fees. Plus, in personal finances, it can contribute to the cycle of credit card debt. That is not the type of cash advance we are talking about here, though.

Instead, by "cash advance" we mean Square's new cash advance program for small businesses. CNN reports that the company Square Capital will provide this service. This is the same Square that many small businesses use to process credit card purchases made by customers. Under the new program, Square will use the data collected from stores that already use its technology to determine how much capital a business needs to obtain their goals. Square will provide the capital to the business owner so he or she can do things like open another location or make other business improvements or expansions. To recoup the investment, Square would then collect a portion of the proceeds from every credit card transaction it processes for the business. In order to explain exactly how this would work, the CNN report states:

For example, Square may agree to advance a customer $10,000 in exchange for $11,000 in future sales. Square could take 10% of the company's daily credit card sales until the money is paid back.

This could provide real repayment flexibility to business owners whose income is cyclical. For example, in a retail business, the payments to Square would wind up being larger when sales are up around the holidays, and lower when sales drop off in January.

Another benefit of this system is that it does not involve paying interest. Fox Business reports that Square will not be charging interest, and instead will be charging a set fee up front. So in the above example, the set fee for the advance of $10,000 would be $1,000. That is what the fee would be if it took the business one month to repay, or ten years to repay. For debts that may take an extended time to repay, this could result in real cash savings.

Square is not alone in the market. Fox Business reports that PayPal also has a similar program called the PayPal Working Capital Program. There are also multiple small start ups that are doing similar things. This sort of program may not be right for every business looking to expand, but it provides an additional option from which some businesses may benefit.