In the world of e-commerce today, there are few names as powerful as Shopify. In just over ten years, Shopify has become the leading commerce platform designed for businesses of all sizes. Whether a business sells online, on social media, in a traditional store, or even out of the trunk of a car, Shopify can make the process of selling online smoother.
Shopify benefits e-commerce stores in a myriad of ways, such as its website-building service, shipping and handling support, customizable checkout systems, order management, and inventory management.
It also offers multi-channel selling and a mobile app for an on-the-go Shopify store. It’s undoubtedly one of the best overall e-commerce solutions in the market. In addition, now Shopify can even help small businesses get the financing they need to either start their operations or keep running smoothly.
It’s not uncommon for small businesses to need additional financing to meet expenses, or to even become operational. While there are many options available for a business to get funding, Shopify Capital does offer some unique benefits.
What is Shopify Capital?
It’s a lending program of the e-commerce platform. This unique program, which began in 2016, is only available to qualifying businesses in the United States, Canada, and the United Kingdom. While Shopify customer financing options come in the form of both short-term loans and merchant cash advances, the cash advances are more readily available throughout those three nations.
Interest rates from these cash advances are typically much lower than those available for small loan amounts from traditional banks. In addition, funding from Shopify means that businesses can normally benefit from a quick application process and a fast turnaround for receiving funding. Also, credit scores and credit ratings are not obstacles to getting approved. Shopify determines the potential of a business, then offers several flexible means of funding to help it reach that potential. Lastly, it also offers a flexible and reasonable way to pay it back.
Under the terms of Shopify Capital, Shopify purchases a portion of the future receivables of a business. It then takes a cut of future sales to repay the capital it provided. The Shopify financing program has proved immensely popular with businesses. During the fourth quarter alone of 2019, Shopify Capital issues $115.9 million in merchant cash advances and loans. That amount was 61 percent more than the fourth quarter of 2018. As for 2020, the coronavirus pandemic has resulted in smaller Shopify small business loans being offered.
Why Shopify Capital for Small Business?
There are a lot of business loans and other financing options available for businesses. But for a small business, it may not always be easy to get the capital it needs. Applying for a traditional loan can be a complicated process, and traditional lenders want to be sure that a business can make a consistent profit over the long term. Good credit ratings and good personal credit scores may also be required.
Since most small companies cannot finance their launch or plans for expansion, Shopify Capital can be a valuable source of funding.
Shopify Capital: Terms and Fees
The level of Shopify business loans can range anywhere from $200 to $1 million but is typically at the lower end of that spectrum. For repeat borrowers, larger Shopify seller loans are offered with each subsequent loan.
There are no maturity dates for merchant cash advances. For short-term loans, the maturity loan is 12 months. The factor rate can be 1.1 or 1.13. There are no origination fees, and no collateral is required.
Rather than charge interest rates, Shopify Capital uses a factor rate to determine a business owner’s borrowing rate. To do this, Shopify calculates a fee based on the amount borrowed to determine how much the business owner must repay. Shopify then multiplies the amount borrowed by a factor rate, which is either 1.1 or 1.3.
Shopify repays itself by taking a percentage of the borrower’s daily revenue, which it calls a “remittance rate.” This rate fluctuates with the cash flow of a business. As a result, the business is not given a specific repayment date. Rather, Shopify keeps making daily withdrawals according to the remittance rate until the merchant cash advance has been repaid in full.
Loans via Shopify Capital work differently, with full repayment required in 12 months or less. Shopify provides a roadmap toward this goal, with payments – or what Shopify calls “milestones” set every 60 days to keep repayment on track. At least one-sixth of the total amount due to be repaid must be repaid every 60 days. Milestones don’t apply to recipients who receive merchant cash advances.
Shopify small business loans through Shopify Capital are only available in certain states of the United States. Businesses repay the loan in six repayment cycles, which are also called milestones, over 12 months. These repayment cycles are automatically deducted from the account of the business.
Merchant cash advances and short-term loans through Shopify Capital don’t charge interest and, thus, don’t have an actual percentage rate (APR), borrowers can still compute a rough APR for comparison.
Repayment for the merchant cash advances through Shopify Capital is more closely linked to sales. In this scenario, Shopify is repaid through a percentage of future daily sales. As a result, repayment can take more or less than the fixed 12-month repayment period of a Shopify Capital loan.
How Does a Business Qualify For Shopify Capital?
Many businesses owners may wonder, “How do I get a loan from Shopify?” But the answer isn’t very complex. To qualify for Shopify Capital, businesses must:
- Sell on Shopify;
- Operate in the United States, Canada, or the United Kingdom;
- Process a certain amount of gross merchandise volume (GMV);
- Be considered to have a low-risk profile; and
- Have Shopify Payments or a third-party payment provider.
How to Apply for Shopify Capital
Shopify Capital requires no specific qualifications as far as revenue, how long the business has been operational, or personal credit scores. There is also no way for a business to apply directly for Shopify Capital. Shopify monitors accounts and sends invitations to eligible businesses by an e-mail alert and a dashboard message. After a business applies, Shopify conducts a further screening process before approving the business and issuing funds.
When a business is notified that it may be eligible for Shopify Capital, it will receive a few different offers to choose from. These offers will feature different amounts available to borrow, remittance rates, and other potential factors.
During the second round of screening, Shopify’s underwriters examine the accounts of applicants to ensure their eligibility for the offers presented. If a business is found ineligible for those offers, alternative offers may be presented. In some cases, the underwriters find that a business may not qualify for any funding at all. If a business accepts an offer after this second stage of screening, the funds will be sent to its bank account.
Once a business receives its dashboard alert that it may qualify for funding, it can request a merchant cash advance from Shopify Capital by entering its Shopify admin account, then clock on “Settings” followed by “Capital.” After that, the business owner must:
- Find their eligibility alert from Shopify, then view their available funding offers;
- Click “Request” on the funding option they’d like to pursue;
- Review the terms and conditions of the funding, such as amount, repayment terms, and the like.
- Click on the “Shopify Capital Agreement,” read through the agreement and click “Accept Terms” at the bottom of the page.
The application process typically takes between two and five business days. After approval, it takes another day for the funds to be deposited in the business’ bank account. Some businesses have been known to receive funds within hours after being approved. But if a business changes its payment provide to Shopify Payments at the same time, approval may take longer.
If a business is approved to receive funds via Shopify Capital, the amount of money available will remain valid and available for 30 days. But Shopify continuously re-evaluates businesses to determine whether or not they’ve become more or less of a risk.
Once Shopify revokes a pre-qualified amount – or if that amount expires after 30 days – then that amount will no longer be available to the business. However, if a business is still eligible for any funding from Shopify Capital, a notice will be displayed on its Shopify admin page.
Is Shopify Capital a Good Idea?
Shopify Capital isn’t a good fit for all businesses, simply because not all businesses qualify to participate. But, for those businesses that do qualify, it makes sense for a variety of reasons such as:
- Reputation. Since Shopify is a reputable company, business owners know they are dealing with a professional, trustworthy operation.
- Ease of doing business. Since Shopify alerts businesses if they meet eligibility requirements, businesses don’t have to determine if they qualify. The application process itself is fast and easy. Applicants can quickly be pre-qualified as there are no credit score requirements.
- Repayment. The repayment plan for loans and cash advances is automatically set up with your Shopify account. This prevents businesses from missing a scheduled payment. Rates tend to be competitive and inexpensive, and there are no extra fees.
- Bad Credit. Businesses with bad credit can qualify for Shopify Capital. That’s because Shopify is already familiar with the business that uses it. As a result, Shopify-related businesses with bad credit are more likely to receive funding.
Businesses also like the online reporting used to keep track of progress through the integrated Shopify platform.
On the downside, Shopify’s repayment plans and interest rates can be more expensive when compared to other financing options. Repayment can also be difficult to understand. The remittance rate is variable and can be confusing, and repayments are frequently required since there are no long-term financing options available. It can be hard for a business to know how much it’s borrowing compared to how much it owes.
For Shopify businesses that want financing, but either don’t qualify for or don’t want to go through Shopify Capital, the Shopify business loan calculator can help them determine what level of outside funding is right for them.
Businesses use funds from Shopify Capital to meet their own unique needs. Seasonal businesses, for instance, can use loans for Shopify stores as a way to get through until the next surge in their sales. Less predictable slumps, such as those caused by the COVID-19 pandemic, can also be easier to navigate with extra cash on hand through Shopify Capital.
Many e-commerce businesses put a lot of effort – and money – into packaging design in an attempt to differentiate themselves from their competition. Investing funds from Shopify Capital into the creation of custom packaging and labels can yield a significant return. Surveys have indicated that 40 percent of buyers are more likely to make a repeat purchase if their package comes in a stylish package.
Advertising is another potential use for Shopify Capital funds, especially in terms of building on existing ad campaigns. Expanding an existing business or funding an entirely new e-commerce operation are also common uses of funds from Shopify Capital.
Other Financing Options for Shopify Sellers
Since not all businesses that use Shopify will qualify for Shopify Capital, it’s only natural that those businesses may wonder “How do I get money to run my Shopify store?” Fortunately, there are other financing options for those businesses that find themselves in this situation.
One option that businesses can pursue is a merchant cash advance loan from an alternative lender, like Biz2Credit. The terms on these vary, but typically qualified sellers must have been in business for at least nine months and make on average at least $2,000 per month. There are no origination fees or hidden fees.
Since these loans are available from alternative lenders, this means they can be obtained by individuals and businesses whose credit ratings might not be as strong as required by a typical brick-and-mortar lender. Alternative lenders are a great way to access capital quickly with minimal obstacles.
These alternative loans can be used by businesses to complement other funding options such as Shopify Capital or other lenders to fill short-term needs such as additional inventory.
Shopify Capital Complaints
Customer reviews about Shopify Capital can be hard to find since feedback on the service can get lost in reviews about customer service overall. But many Shopify customers seem to be confused about the availability of the service. The inability for businesses to apply directly to the service is also a sore point. Shopify Capital loans and merchant cash advances can also be quite expensive relative to a bank loan, as rough APRs can be over 30.
Some customers also express frustration that Shopify Capital customer service representatives appear to strictly follow a script rather than provide customized support. In addition, the decision between a short-term loan and a merchant cash advance can be confusing to some businesses. In these instances, the help that Shopify Capital customer service offers can be lacking.
Fortunately, there are many other resources available to help small businesses decide whether a short-term loan or merchant cash advance is better suited to meet their needs. Despite the extra expense, Shopify Capital can be considered a good fit if it helps a business increase its revenue and, in the process, offer a low-pressure method of repayment. Shopify Capital is especially attractive to businesses that have less-than-stellar credit, need financing quickly, and don’t want to navigate a complex application process.