Whether it’s to restock inventory in time for the next holiday sale or invest in a new can’t-miss marketing channel, consistent cash flow is everything.
But even if your business is on a firm upward trajectory, cash flow gaps are part of the game. Luckily, the right kind of e-commerce funding can provide the working capital you need to keep the business moving.
Receiving capital, however, isn’t always easy.
If you run your business on Shopify, you’ve probably heard about Shopify Capital. If not, read on. We’ll cover everything you should know about the program, including when it makes sense to use it and when to look into alternatives.
Everything You Need to Know About Shopify Capital
- What Is Shopify Capital?
- How Does Shopify Capital Work?
- What Is Shopify Capital Used For?
- How Do You Qualify for Shopify Capital?
- Shopify Capital Alternatives
- Shopify Capital Customer Reviews
- Grow Your Business With Working Capital
What Is Shopify Capital?
Shopify Capital is a business funding program offered directly by Shopify (similar to the Amazon Lending setup). Pre-qualified sellers can use Shopify’s small business loans and merchant cash advances for, according to Shopify, anything they need for their business.
Borrowers receive a lump sum of funding and agree to a fixed borrowing fee.
Shopify Capital: Pros and Cons
Shopify Capital funding is only available to sellers pre-qualified by the marketplace. This can be both a pro and a con.
On one hand, if Shopify reaches out to you with an offer, the path forward is simple. There’s no detailed application and no minimum credit score. Shopify will simply share your funding options based on its underwriting process.
On the other hand, if you don’t hear from Shopify, you’re not eligible. Unfortunately, since Shopify doesn’t share eligibility guidelines, you’ll find little insight on how to become eligible.
Shopify merchants who qualify can use the funds on almost anything business-related and manage repayments directly through an online dashboard.
|– Simple application process|
– No credit check
– No repayment deadline
– Quick availability of funds
– Use funding on anything business related
– Manage repayment through Shopify dashboard
|– Only for Shopify users|
– Funding availability limited based on business location
– Amounts are non-negotiable
– Unclear eligibility guidelines
– Expensive rates
How Does Shopify Capital Work?
Through Shopify Capital, sellers can receive funding between $200 and $5 million based on sales history and volume. Funding recipients agree to a total payment amount, which includes the borrowed amount plus a fixed borrowing cost.
Shopify Capital offers two forms of funding: loans and merchant cash advances. These options vary based on your Shopify business location but essentially function the same.
Shopify Capital Availability
|Business location||Available funding options|
|Canada||Merchant cash advances|
|United Kingdom||Merchant cash advances|
Source: Shopify Help Center
How Does Repayment Work?
Neither of Shopify’s funding products has a traditional interest rate. Instead, Shopify uses a factor rate which, based on the examples Shopify provides, is around 1.1-1.13.
Under your Shopify Capital loan or merchant cash advance purchase agreement, you’ll agree on a total payment amount, which is your loan amount plus the fixed borrowing cost.
Payments are automatically pulled as a percentage of your daily sales. If sales increase, you’ll pay your total payment amount back faster. If you have a day with no sales, you won’t make a payment that day.
You can view and manage your daily sales revenue, remaining balance, and payment history straight from your Shopify account.
What Is Shopify’s Factor Rate?
One of the biggest questions about using Shopify Capital is what the factor rate is and how it will impact your repayments.
According to Shopify’s glossary of terms, the factor rate is “the number that the amount received multiplies by to determine the total to remit.” Like an interest rate, the factor rate is the fee you pay to Shopify Capital in exchange for accessing a loan or merchant cash advance.
While Shopify doesn’t specify this rate, it does give example use cases in which the factor rate works out to 1.1-1.13.
Factor Rates vs. Annual Percentage Rates
One of the biggest differences between a merchant cash advance (MCA) and a traditional loan is that MCAs use factor rates instead of annual percentage rates (APRs). These two rates may seem similar, but it’s important to understand the difference.
Here are some examples. Let’s say you take a $10,000 loan.
If your loan has an APR, the amount of interest you pay is a percentage of the loan’s principal. At the beginning of payback, the remaining principal is higher, so the amount of interest you owe is higher.
Paying back a large chunk or paying the loan off early means you’ll pay less in interest because the principal has decreased. If your loan has an APR of 7%, your interest the first month will be $700. If you choose to pay down the principal to $5,000, you’ll only accrue $350 in interest the next month.
If your loan has a factor rate, you’ll pay a fixed amount of “interest,” called a borrowing fee. The cost of borrowing doesn’t compound or change as you pay off your loan. If your loan has a factor rate of 1.13, you agree to pay an additional 0.13 (13%) of the original borrowed amount.
In this case, you’re on the hook for $1,300 in borrowing costs regardless of how quickly you pay back your loan.
Often, the loan’s payback terms dictate how quickly you pay it back by defining the percentage of sales the lender will collect. If your monthly sales are $30,000 and the lender holds 15%, you’ll pay the loan off in just 76 days. That’s an effective APR of 127%.
By contrast, if you chose to pay off your APR loan in 76 days, you’d pay very little in interest because you reduced the principal so quickly.
Quick Look: Shopify Capital
|Loan amount||$200 – $5 million|
|Estimated APR||Shopify doesn’t charge a standard interest rate. Instead, it uses a factor rate of around 1.13.|
|Fees||No subscription fees, but standard Shopify payment fees apply — in addition to your fixed borrowing cost.|
|Terms and Repayment||No specified term lengths. Instead, you pay a percentage of your daily sales until the total cost of your business financing is paid off.|
|Funding Speed||Funding requests typically reviewed within 1-3 business days. Once approved, you’ll receive funding within 2-5 business days.|
How Shopify Calculates Your Loan Amount
Shopify explains that its underwriting model analyzes “millions of data points.” However, many merchants believe there’s a significant lack of transparency in terms of both eligibility and funding offers.
We do know that pre-qualified sellers will typically receive three funding offers and can choose to move forward with the one that best fits their needs. These offers are non-negotiable — take one or leave them.
How Many Times Can I Receive Shopify Capital?
Shopify doesn’t specify a maximum number of times sellers can receive funding. Once you’ve repaid at least 65% of your active loan or merchant cash advance, you’ll likely be eligible for more funding.
Your funding options will be automatically displayed on the Capital page of your Shopify admin dashboard, and you can apply there. You’ll receive the additional funds within 2-5 business days, but repayments for your second loan won’t begin until your first loan is fully repaid.
What Is Shopify Capital Used For?
At SellersFi, we’re big believers in the power of using e-commerce funding to grow your business. With the right funding, merchants can strengthen their inventory acquisition strategy, expand to new markets, invest in new marketing tactics, and more.
Nothing is more soul-crushing than seeing an increase in sales momentum and not having the inventory to support it. Access to extra capital means you can quickly replenish inventory when you need it — no waiting on marketplace payouts.
New Territory Expansion
When you’re dominating in your current market, it’s hard not to wonder which other markets your offers might translate well to. With your extra capital, you can find out by branching out into new marketplaces, complete with a new language- and market-optimized storefront.
New Marketing Tactics
The world of e-commerce marketing is always evolving. Seasoned sellers know all too well that you can’t rely on the same marketing strategies year after year. The right funding behind new advertising channels, influencer marketing, social media, content marketing, or website optimization strategies can deliver powerful ROI.
Customer Loyalty Programs
Customer loyalty is more important than ever. If you could use a lift in this area, consider using your loan to create a customer rewards program or customer appreciation campaign.
New Product Launch
Launching a new product is a huge undertaking that starts with R&D. You can use your funding for product development to make sure your new addition is the right move, then promote it with proven tactics.
Of course, any loan has a cost associated. It’s all about cost-benefits analysis and prioritizing profit over revenue.
Borrowing to invest in high-ROI activities can help you take your business to the next level, but it’s crucial to understand the total cost of any funding you consider so you know exactly what your break-even point is.
How Do You Qualify for Shopify Capital?
Shopify uses an underwriting model powered by machine learning to determine eligibility. This model incorporates a wide range of data, but here are a few baseline criteria.
To be eligible for Shopify Capital, you must:
- Be a Shopify merchant. Shopify Capital is only available to select merchants in the US, Canada, the UK, and Australia.
- Sell on Shopify at least 90 days.
- Comply with Shopify’s Acceptable Use Policy and Terms of Service.
- Demonstrate consistent sales. Shopify doesn’t specify a qualifying revenue level.
Shopify does not explain its eligibility criteria outright, which can be frustrating for some merchants. Both eligibility and the amounts offered are based on your online store’s risk profile as assessed by Shopify.
However, since loan repayments are a percentage of future sales, you can bet the platform has stringent requirements behind the scenes to ensure funding recipients can support repayments until the total amount is repaid.
How to Apply
You can’t actually apply for Shopify Capital — it’s a “don’t call us, we’ll call you” situation.
Here’s what to expect if you’re eligible to apply:
- Invitation: If you’re eligible, you will receive both an email and a message in your Shopify admin dashboard to view funding options.
- Funding request: Once you receive an invitation, you can submit a request for a pre-qualified amount directly through the dashboard.
- Underwriting process: The underwriting process begins when Shopify identifies your business as potentially eligible for funding based on your revenue history. The initial offer of your pre-qualified amount is only valid for 30 days and can be revoked afterward. If you submit a request, Shopify underwriters review your application and revise the pre-qualified amount if needed.
Shopify Capital Alternatives
There are lots of funding options out there for e-commerce business owners. Small businesses and startups are turning to alternative financing options like crowdfunding, peer-to-peer lending, and fintech platforms.
Online working capital providers are an increasingly popular alternative to traditional bank loans. Many of these funding solutions were designed specifically for e-commerce businesses, so their terms tend to be seen as more fair and flexible.
Here are a few popular alternatives to Shopify Capital.
|SellersFi||Working capital, invoice factoring, invoice flex, term loan||$5K – $10M||1% – 25%||3 – 12 months|
|Bank of America||Secured and unsecured lines of credit, term loan||Starting at $1,000||Based on relationship with BoA||Vary by product|
|Amazon Lending||Term loan, interest only loan, line of credit, merchant cash advance||Up to $5M||Vary by product||Vary by product|
|OnDeck||Line of credit, term loan||$5K – $250K||Vary by product||12 – 24 months|
|Kapitus||Line of credit, invoice factor, purchase order financing, working capital, and more||Up to $500K||Factor rates up to 1.25||Up to 5 years|
|Biz2credit||Working capital, term loan, commercial real estate loan||$25K – $6M||Starting at 8%||Up to 36 months|
When considering funding options, it’s important to read the fine print.
Here are some questions to answer as you research alternatives:
- What are the eligibility requirements — years in business, revenue levels, etc.?
- How much funding do you need?
- How much does the lender offer?
- Does the lender use interest rates or factor rates?
- How much will you pay to borrow the money?
- What return do you expect to see on your investment of the borrowing fee?
- How long is the repayment term? Does that work with your expected timeline?
Shopify Capital Customer Reviews
Consumer rating platforms, such as the Better Business Bureau and Trustpilot, provide insight into common issues and concerns among Shopify users. Keep in mind, Shopify has over 800,000 sellers and more than 200 million buyers, so hundreds of complaints on rating websites are par for the course when dealing with brands of this size.
So what do actual borrowers think about Shopify Capital?
You’ll find more practical feedback about the Shopify Capital program on community forums, including Reddit and Shopify Community, where merchants answer questions and provide feedback to other users dealing with similar issues.
Members of the Shopify subreddit have had mixed experiences with Shopify Capital.
For sellers with high daily sales volume, the accelerated payback can be expensive. Redditor sherril8 explains:
If I take a look at my current Shopify Capital offerings, they are offering me $10k with a repayment of $11.3k by taking 17% of my daily sales. This ends up being almost a whopping 42% APR.
Most Redditors agree that, if available, alternative funding options are less risky. However, as user Significant-Repair42 points out in the same thread, the type of loan offered by Shopify Capital may be the most viable option for many sellers.
Not everyone is going to have the same access to traditional banking loans. Some of the 4 C’s of credit are not equally distributed. Credit, Capacity, Capital & Collateral. For instance, many people do not own a house. That would put them instantly at a disadvantage of getting a bank loan. (Capital and Collateral)
Other sellers, like Redditor fluentinimagery, have generally positive feedback on the program:
Used it 6 times… no hidden fees or strings. It’s exactly what it says it is. Support has been solid, and although not the best loan to take, when you’re in a pinch, it’s a huge help. Nothing but praise for it from my end.
In a Shopify Community thread, several users chime in that they’ve received multiple loans and look forward to the next offer — but that it can be difficult to predict when that offer will come and how long their request review will take.
It’s been a year and no update which is weird.
I got told from shopify that my shop meets eligibility but that they go through sending offers to each shop individually.
On the capital homepage it says my shop is not eligible though, so I’m getting very mixed messages from shopify customer service and the actual dashboard.
Shame they don’t make this more accessible, especially during these slower summer months as it would be great to boost our marketing plan so we can push more sales and get better market visibility before the Christmas shopping season begins.Shopify user Emilymt
Grow Your Business Your Way With Working Capital
Many merchants don’t take funding because they don’t understand their options.
Shopify Capital is a fast way to secure extra funding for your e-commerce business — if you’re eligible. However, if you haven’t received an offer from Shopify, know that there are other options available outside of traditional banks.
You should be able to grow your business on your terms. A factor rate-based loan with inflexible terms might not always be your best path forward.
From inventory and marketing to product launches and more, thousands of e-commerce sellers trust SellersFi to help them grow their business.
Our team of e-commerce experts will match you with the right funding and terms that work with your goals. Explore our full suite of e-commerce funding solutions to learn how we can help you scale, and get started today.