Square Lent $251 Million to Small Businesses in Q1

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It was another big quarter for Square Capital, who originated more than 40,000 business loans for a total of $251 million. That’s an increase of 64% year-over-year but only up 1.2% from the previous quarter. The company had $51 million in loans held for sale on their balance sheet as of March 31st.

Overall, Square, Inc. had a net loss of $15 million for the quarter compared to a $96.7 million loss over the same period last year. Investors took the news in stride, pushing the stock price up from under $18.50 to temporarily over $20.

Of notable interest in the fine print of their 10-Q, is acknowledgement that there have been and could be challenges to the chartered bank model on which they rely to make their loans, to the point where they say it’s possible they could one day have to revert back to the merchant cash advance model.

We have partnered with a Utah-chartered, member FDIC industrial bank to originate the loans. There has been, and may continue to be, regulatory interest in and/or litigation challenging partnered lending arrangements where a bank makes loans and then sells and assigns such loans to a non-bank entity that is engaged in assisting with the origination and servicing of the loan. If our bank partner ceases to partner with us, ceases to abide by the terms of our agreement with them, or cannot partner with us on commercially reasonable terms, and we are not able to find suitable alternatives and/or obtain licenses to make loans ourselves, Square Capital may need to enter into a new partnership with another qualified financial institution, revert to the merchant cash advance (MCA) model, or pursue an alternative model for originating loans, all of which may be time-consuming and costly and/or lead to a loss of institutional third party investors willing to purchase such loans or MCAs, and as a result Square Capital may be materially and adversely affected.

Square originally relied on the merchant cash advance model but switched to making loans after they found it challenging to package them up and sell them to investors.

Last modified: May 4, 2017

Category: Business Lending

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