Square to challenge banks in business loans

But 95 per cent of bank loans to small business are secured and half of those are with residential property. New small business ombudsman Bruce Billson said in March banks’ over-reliance on property security has been corrupting loan assessments. Square will offer loans of up to $75,000 without security.

Square is growing its merchant base by selling card payment receivers at outlets including Officeworks for $50, a much cheaper rate than the banks charge to rent clunky terminals. Square has mostly targeted micro-businesses but has recently been moving up-market with new offerings of point-of-sale software that can be used for inventory and team management, and online sales.

Like the buy now, pay later players – which used payments as an entry point for broader financial services – Square will now use payment acceptance as a springboard into lending, just as it did in the US. Its banking expansion comes hot on the heels of American Express, which said in February it would start business loans on the back of its popular credit card offering.

It has been a hard market to crack. Tyro has struggled for more than a decade to slowly build up market share in payment terminals against major and regional banks, and its lending volumes are tiny.

But Reserve Bank assistant governor Chris Kent said in March that bank lending to small business has been flat over the past two years as many SMEs struggle to access financing.

Square’s lending operations in the US, known as Square Capital, launched five years ago and have provided more than $US8 billion to more than 435,000 small businesses. The rate of default is around 4 per cent of gross loans.

Three clicks and no paperwork

Samina Hussain-Letch, Square Australia’s head of industry and payments, said the San Francisco-based player hoped to attract customers under-served by the major banks, which require “reams of paperwork and personal guarantees, even for small size businesses”.

Many small businesses are not willing to provide security such as the family home and find application processes cumbersome. Square’s loans will involve three clicks and no paperwork, she said.

Square declined to disclose the dollar range of its loan fees. These will be fixed, depending on the risk profile of the business assessed by Square using the payments data.

A dynamic line of available credit will be shown to business owners on their Square dashboard. The seller will pay the fee from a pre-determined fixed percentage of sales, with payments made daily. The fee will not change during the life of the loan and is specified upfront.

While no personal guarantees are required for funding up to $75,000, Square will take guarantees to lend up to $250,000 for certain customers, and will make loans for as low as $300. That brings Square onto the turf of bank-issued credit cards for small business, which can levy annual interest rates of 20 per cent.

“This is not about offering high risk loans but is based on responsible lending for sellers,” Ms Hussain-Letch said. Small business lending is not regulated in Australia.

Tyro offers a similar product that charges its terminal customers a fixed fee, not an interest rate, for loans with repayments also based on a proportion of sales. The major banks do not offer this sort of product and remain wedded to charging annual interest rates on outstanding balances and overdrafts.

Tyro became an APRA-regulated bank in 2015. At least for now, Square has no plans to become a regulated deposit taker in Australia – although it is now a bank in the US, with Square Financial Services based in Salt Lake City. Square Capital loans are now issued by its bank; previously, they were issued under a partnership with Celtic Bank, another Utah-based lender, American Banker reported on March 1.

In Australia, the loans will be funded off Square’s local balance sheet, not the US bank. It operates under an ASIC-issued Australian Financial Services Licence.

Ms Hussain-Letch, who previously worked for eight years at Visa, said becoming an Australian authorised deposit-taking institution (ADI) “is not in the plans” in the short term. “It took a huge amount of work in the US. The barriers to entry are lower in Australia and it is something we might consider when time is right.”

Mr Dorsey is excited about Square’s prospects in Australia, she said. It has doubled the size of its local team over the past year to 150. “We are doing really well,” Ms Hussain-Letch said. “Australia is recovering now from COVID and the timing of bringing this lending offer out now has been extremely intentional.”

Square is listed on the NYSE with a market capitalisation of $US120 billion, the same size as Commonwealth Bank, valued at $155 billion on the ASX. Mr Dorsey’s other business, Twitter, is valued at $US55 billion. Square stock is up 27 per cent in April.