CNBC Disruptor 50

Square expands small business financing program

Jack Dorsey, co-founder and CEO of Square.
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Payments and financial services company Square said Tuesday it is expanding its small business financing program, Square Capital. Its first investor, Victory Park Capital, is tripling its original investment, and it's bringing on new investors, including Colchis Capital.

Square—which was named to CNBC's Disruptor 50 list—is best known for its payment system for small businesses, and its square shaped credit card reader dongle that turns any smartphone into a register, but the company has been branching into other businesses enabled by the data it collects from these payments.

Square Capital identifies small businesses based on their processing history and provides cash advances, which the business owner agrees to repay with a cut of future sales. Square's data about how much money small businesses are bringing in, allow it to determine which companies will benefit from the cash advance, and which ones are most likely to be able to quickly repay—mitigating risk.

"Square proactively reaches out to businesses eligible for financing, using unique advantages derived from its large and growing core payments business—including sophisticated risk modeling and machine learning—making the service faster, more flexible and transparent," the company said in a release.

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CEO Jack Dorsey envisions Square Capital as part of a virtuous cycle: Information about how much money small businesses bring in gives Square the data to ensure that the cash advances it provides are low risk. Providing successful small businesses with cash advances enables them to expand, so they can take in more money through Square's payment system, paying Square a percentage of each payment. The bigger the businesses get, the more money should flow to Square, both from cash advance fees, and the higher volume of payment processing.

Square Capital has advanced more than $100 million to over 20,000 independent businesses since the program started last May. (Tweet This) Last month was its biggest month yet—advancing nearly $25 million in capital, giving it a $300 million annual run rate. Square said in its press release Tuesday that 80 percent of merchants who have completed their first Square Capital advance have renewed for a second round of capital.

It's hardly the only company in the business of offering cash advances to small businesses who might not be able to secure traditional financing. Square is going up against LendingClub and OnDeck, which are both public. But based on its latest numbers, Square Capital is off to a faster start than either of those rivals—both of them reaching the $100-million-a-year range several years after their launch.

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The expansion of Square Capital is another step in company's push to offer complete financial services to small businesses. In April it expanded into small business marketing, and it offers tools like a Chargeback Protection program to help deal with disputed purchases.