Square Inc (NYSE:SQ) Ventures Into Online Lending Space

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A recent Morgan Stanley document highlighted the growth in the online lending industry. The data showed that online lenders represent just 3.3% of the total small business lending space currently. Given the projection that the share of these lenders will reach 20% by 2020, it can be said without doubt that the scope of growth of online lenders is enormous.

Race against OnDeck Capital Inc (NYSE:ONDK)

It appears that Square, a San Francisco-based payments company, has already realised this fact, which is why it has revealed its intention of venturing into traditional online lending space. By doing this, Square will come into direct competition with established lenders such as OnDeck Capital.

By staging the new loan products, Square aims to help those small businesses that attain sales through point of sale services. The company will factor in the sales data and cash flow of the applying businesses to ascertain their eligibility for small business loans. Such evaluation of data will also help in setting up the fee structure of the loan for Square. More or less, Square will use the same algorithm as it uses for lending out cash advances.

Fees and conditions

As per the information provided by the company, fees on the new loan products will vary in between 10% to 16% of the total sum borrowed. The repayment tenure of the new loans will be 18 months, which is higher than the cash advances repayment tenure of 12 months. Also, Square will retain 10% of each transaction. Given the repayment track record of cash advances, which typically closes in nine months, Square anticipates the borrowers of new loans to complete their repayment schedule much before the stipulated time of 18 months.

Square will fund the businesses partly through its own funds while the remaining will be sourced from Utah’s Celtic Bank. These loans will be bundled into hedge funds to be sold to investors. Square had lent out a total sum of $400 million in 2015.

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