PhillyDeals: Smartphone payment system changing business loans

He can afford to hire salespeople. But Jack Dorsey, who owns a billion dollars' worth of stock in the last company he started, Twitter Inc., plus another billion in his current company, the smartphone-based payment system Square Inc., was in Center City last week doing the job himself.

The soft-spoken, self-taught programmer, 37, recalled two months he spent in Philadelphia, between dropping out of colleges elsewhere, as a contract coder for medical-device companies.

"I think my hair was blue back then," Dorsey told me.

He was visiting a client, the 1717 Arch St. outlet of HubBub, a cleanly styled coffee chain set up by cheerful Penn grad Drew Crockett after he bailed out of a Wall Street job.

Dorsey was promoting his latest project, Square Capital, which lends money to Square Inc.'s business clients - hassle-free, he says, compared with borrowing from a bank.

Square Inc. processes card payments through its Square Register software, on smartphones and iPads, so you don't need a physical cash register. Square charges 2.75 percent from each purchase, which is competitive with what the big credit- and debit-card networks charge merchants to clear customer purchases.

Records from all those payments give Square the kind of cash-flow information that bankers rely on to determine if a business is creditworthy.

"So with extreme confidence we can advance them some capital - say $5,000 for a new location or a new salon chair or a new employee or some marketing - and know that it will be returned," Dorsey said. "They get an e-mail, they tap one button, the money goes into their account the next business day."

That loan is paid back to Square with fees, as it collects a part of the retailer's future smartphone-based payments.

No paperwork, no collateral, no weeks waiting. Square says it has made $50 million in Square Capital loans and has arranged to finance hundreds of millions more. The typical loan is repaid in 10 months.

Are systems such as Square Capital the future of small-business finance?

"Dorsey has ushered in a revolution," said Jim Shanahan, founder of Prepadian Inc. and based in Landenberg, Chester County. "Mobile point-of-sale systems are taking over."

But software-based loan systems are becoming "a very crowded field," warns Ami Kassar, head of MultiFunding L.L.C., an online small-business loan brokerage based in Ambler. He wants evidence that lenders such as Square Capital are actually bringing costs down.

Square says charges vary; a $10,000 advance might cost $1,000 in fees. There are other costs to compare, says Dorsey: "There's the cost of time."

The equation works for HubBub's Crockett. He says Square Capital helped him instantly finance a new catering business. It also gave him cash to fund a quick decision to buy enough iconic red coffee cups to drop the cost to a dime a cup (you need to buy 50,000 at a time to get that price), instead of the 45 cents a cup he had been paying for a single case of 1,000 cups.

Square says it supplies its smartphone payments system to merchants at no charge, and throws in free analytics that track costs and help determine staffing levels.

"We run our whole point-of-sale operation through Square Register," Crockett said. "You can access it all through my computer at home."

Dorsey says Square clients include Whole Foods, Uniqlo clothing, and other millennial-focused companies. He says his goal is to replace cash registers in every store in America.