Shopify Capital Review
In April of 2016, Shopify joined a number of other Internet-based services in providing its customers with financing options by launching Shopify Capital. Like the financial assistance services that Paypal and Square have both been offering, Shopify Capital is designed to provide funding to small businesses. Individuals who use Shopify’s eCommerce platform to host their website or use their point of sale services may be able to obtain a merchant cash advance without going through a bank or obtaining a standard loan.
Shopify Capital is part cash advance, part small business loan. It is important to note that this program is only available to businesses that are established Shopify users. Additionally, this service is only currently available for organizations in the United States, and even then, Shopify is only making Shopify Capital available to a select few of its customers at the moment. The company has stated it intends to expand the service in the future, but for right now, it is limited.
If you’re a Shopify user and think that you might qualify now or want to take advantage of this service in the future, keep reading to find out how the system works. Alternatively, if you aren’t a Shopify user or don’t qualify for their merchant cash advance program, there are some alternative options for small business funding listed at the bottom of this article.
What Exactly Is Shopify Capital
Shopify Capital offers the best parts of small business loans and cash advances while reducing or eliminating the main drawbacks. Instead of being a standard loan that requires paperwork, collateral and a monthly repayment plan, Shopify Capital advances funds to a small business and lets them pay back what they owe by providing Shopify with a percentage of their sales.
There is no interest to be paid, and there are no minimum payments to be made or a restricted time-frame for repayment. This also means that there are no late fees, and the cash advance will not eat into a business’ profit margins through accrued interest owed. However, there is a one-time fee that is attached to the loan amount, which is around 11 percent of the amount of the advance.
How Shopify Capital Is Different From Loans and Cash Advances
In general, cash advances are given to people with little to no collateral, and one major advantage of many cash advances is that people can take their time paying them back. However, cash advances have some severe drawbacks, especially if someone does not pay an advance back immediately.
Interest rates for cash advances tend to be very high since the lender is taking a large amount of risk by foregoing having an advance secured by collateral. If someone does not pay a loan back as quickly as possible, they may find that the interest that they owe exceeds the original advance. Additionally, many lenders charge fees when an advance is not paid off in a particular time frame.
Many business loans originate through a bank, and this requires a large amount of paperwork as well as checking someone’s credit and, in some cases, the credit history of a business. People may also have to put down collateral, and business loans can be hard to obtain. If a loan is approved, organizations will be required to pay interest and will have a set schedule for repayments. Fees may also be involved even if payments are made on time.
Shopify Capital provides merchant cash advances that do not involve processing fees, interest rates and late payment fines. Additionally, the issues of collateral and creditworthiness does not come into play. If someone is struggling to get a small business loan from a bank or is wary of cash advances, this service may be the solution they are looking for.
Different Shopify Capital Options
Only limited numbers of Shopify users are eligible for Shopify Capital. As of a few months after the launch, there is still not a standard application process. Instead, Shopify states that if you are eligible to apply for the program, you will see an invitation on the home page of your Shopify Admin page.
If you are eligible, you will be given the ability to review what financing is available to you. Users will be given three options to choose from, and the screen will show the amount of the advance available to them. They will also be able to see how much they will ultimately owe as well as what percent of their sales will be taken out each day.
For example, someone might see that they can select from an advance for either $5,000, $7,500 or $10,000. If the user selects the $5,000 advance, they will have to pay back a total of $5,560. Ten percent of their sales will be taken each day until the advance is repaid.
For the $7,500 option, the total repayment amount is $8,475, and each day, 10 percent of sales will be used to pay back the advance. With the final option, the total amount to be repaid will be $11,300, and 13 percent of sales will be taken for repayment.
According to Shopify, they are offering advances between $5,000 and $50,000, but they do not state what determines the amount you are eligible for. Presumably, the amount of sales that Shopify has processed for a business will be a major factor in determining the advance available.
Obtaining and Repaying The Advance
Once you’ve selected the advance amount that you’d like, you’ll need to let Shopify know if you’re making payments to another financing provider. It does not state that saying yes will disqualify you for Shopify Capital, but it may reduce your chances of being approved.
Next, you’ll be taken to a terms and conditions page that you must agree to. From there, Shopify states that within two business days, you’ll be notified if you were approved for or denied the cash advance. If you are approved, you could have your funds deposited into a bank account in just 24 hours.
Two days after the cash advance is credited to your bank account, daily payments will be due. Each day’s payments are taken out automatically, similar to the way that Shopify automatically takes out fees for sales or processing credit card transactions.
One of the major advantages of the Shopify Capital system is that there is not a standard repayment plan in place. If funds are not available or sales are not going well, you aren’t obligated to make a regular payment for a particular amount. Additionally, only a fairly small percentage will be paid each day.
If someone selected a plan with a 10 percent per day remit plan, they would have $10 automatically taken out on a day where there were $100 in sales. On a day where $200 in sales were processed, $20 would be taken out.
Shopify allows you to review your payment history as well as how much is still outstanding by going to the Shopify Capital page, which is available through the Shopify admin page. There, you’ll be able to see how much was remitted to Shopify each day as well as each day’s sales totals.
According to Shopify, the successful completion of a merchant cash advance repayment may make someone eligible for another advance.
Since Shopify will be automatically collecting funds through their Shopify Payments system, you are required to use Shopify Payments to be eligible for the program, and you must keep using the system as long as you are still repaying your advance. If you attempt to disable Shopify Payments, your account will tell you that you are not allowed to do so. Once you have repaid your merchant cash advance, you’ll have the ability to disable Shopify Payments.
Why Is Shopify Offering Merchant Cash Advances?
While Shopify stands to gain some revenue from the additional fees that they are charging to take advantage of their merchant cash advance service, their main goal may be to retain users. The fact is that Shopify may not benefit that much in a direct financial manner from the Shopify Capital program. The fee they charge is very likely to be less than what a bank would collect from a standard small business loan, and they may be waiting far longer than a bank to recoup what they’ve paid out.
However, they are able to benefit in two indirect ways. The first is that only Shopify users are eligible for their program. Even when they expand it in the future, it will still be limited to those who use their eCommerce platform or their point of sale program. Shopify’s platform is designed to make money off of the fees they charge to process sales and credit card transactions, so there’s no incentive for them to offer Shopify Capital to non-users.
Further, people are required to use the Shopify Payments system to pay back their merchant cash advance. While this isn’t really an issue for those who use the site as their eCommerce hosting provider, Shopify also has a number of users that run brick and mortar stores. Providing cash advances to these individuals helps to ensure that their processing system is kept in use.
Those who use the program and are able to increase their sales thanks to having additional funding available are very likely to become loyal users. Shopify users have also got another incentive to stay, which is that business owners may be able to take advantage of merchant cash advances more than once.
Finally, it’s just a good business practice to improve the sales generated by the Shopify user base. The more money that businesses using the site make, the more Shopify does because they’re taking a cut of each sale even if someone hasn’t taken advantage of the Shopify Capital program for an advance.
The Need For Programs Like Shopify Capital
Small businesses are incredibly important. Per the Small Business Administration, they make up 90 percent of the companies in the United States, are responsible for providing 55 percent of jobs and generate 50 percent of sales. Although these organizations are critical to the country’s economy, most small businesses struggle to obtain the funding they ask for.
Getting a loan of any type from a bank can be a challenge. Along with the application processes, which tends to be drawn out and generally require either a person, their business or both to have solid credit ratings, there’s also the fact that many banks are reluctant to issue small business loans.
The reason for this is that the traditional underwriting model for issuing small business loans is expensive. This is likely due, at least in part, to the amount of vetting that applicants must go through to be approved for a loan. As a result of traditional banks’ unwillingness to provide loans for smaller businesses, by the end of 2015, only about 50 percent of small businesses with revenues between $100,000 to $1 million were able to secure any financing at all.
This is where alternative funding programs come in and can be so helpful to smaller organizations. Individuals who were turned down by banks often find that alternative funding, usually through Internet-based organizations like Shopify Capital, is available to them and their business.
In 2015, it is estimated that 4.3 percent of small business funding came from alternative sources, representing around five billion dollars in loans. It is believed that by 2020, both numbers will have grown dramatically, and alternative business funding will represent about a fifth of the market and provide around $52 billion to small businesses.
A major contributor to this expected growth is the partnering of traditional banks with online services. Service providers will be able to use computing models and data analysis to connect borrowers with lenders, which will potentially reduce underwriting costs and make small business loans more palatable to standard lenders.
Alternative Small Business Loan Options
Even if you’re not a Shopify user or aren’t currently eligible for the Shopify Capital program, there are still small business funding options available to you beyond standard bank loans. Here are some details about obtaining capital from Paypal, Square and Lendvo.
Like Shopify, Paypal offers funding for a fixed fee to individuals who use their services to run credit card purchases. Paypal states that approval and loan amounts are based on a business’ sales, so there’s no credit check involved. Another reason that there is no credit check required is that payments are automatically deducted from sales, just like with Shopify Capital. However, unlike Shopify, Paypal Capital does have a minimum payment requirement. Every 90 days, at least 10 percent of the total loan amount and fee must be paid.
If you are approved for Paypal Capital, you can get up to 18 percent of your yearly Paypal sales transactions as a loan. Loans are available up to $97,000. The fee that you will pay is determined by the loan amount, your sales history and what percentage of your daily sales go to paying off the loan. You can also make manual payments, and you may have to if your sales percentage isn’t enough to meet your payment obligations.
Square is a service that manages credit card transactions for businesses, and they offer point of sale services and equipment for both online retailers and brick and mortar establishments. Their business services are very similar to Paypal’s and Shopify’s, and their capital program is also quite similar.
Businesses that use Square’s transaction services are eligible to participate in the Square Capital program, which offers loans based on the amount of sales transactions that go through Square. There is one flat fee, and funds are made available within one business day of approval.
As with Shopify, sellers who are eligible are notified by email or through their account, and they are given a variety loan amounts to choose from. The amount of the fee and the percentage of sales that go to repayment are based on the loan amount. Unlike Shopify and Paypal, Square specifically states that loan approval is based on a credit check.
This is our service, and we focus on providing a number of funding options to Internet-based businesses. Unlike the other small business capital options, you don’t have to subscribe to a particular service or use a payment program to obtain funding from us.
However, like other options, our process is quick and easy, and you don’t have to wait for weeks on end to find out what we can do for you. Once you submit an application, we get back to you within just a few business hours. Additionally, we can normally provide you with funding within a day if you have all the information we need on hand.
Along with offering options for providing you with working capital, we also offer a variety of financing options for organizations that operate online. In addition to loans that allow you to purchase premium domains, we’re more than happy to help you obtain the financing you need as a seller on Etsy, eBay or Amazon.
You can apply for loans on our website, and we can fund up to $100,000. We are happy to work with you to find loan terms and flexible payment options that work for you.