How Does Shopify Capital Work?

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How does Shopify Capital work?
(Last Updated On: March 24, 2021)

Is your business prepared for a financial emergency? Do you have lines of credit at your preferred bank? If not, then short term lending programs are abundant and Shopify Capital offers one with unique benefits. First and foremost, to utilize the lending program, your business must run on Shopify. From there, the decision to seek short term funding from Shopify depends on your personal situation.

What is Shopify Capital?

Shopify Capital offers funding to eligible merchants that utilize the Shopify platform to run an e-commerce business. The program works with Shopify Payments, along with other third party payment providers, so the eligible merchants are not limited by their preferred payment processor. However, eligible merchants are restricted by geography as Shopify Capital is not rolled out to all 50 states.

Additionally, the Shopify Capital lending program differs from standard small business loans offered by banks with a few distinctions. First, since merchants are already on Shopify, the lending desk already has financial information available. This makes funding and decision making extremely fast. Second, as a pre-approved merchant, the application process is quick and painless. Third, and perhaps most distinctive, merchants do not repay the loans on a set schedule. Instead, Shopify collects payments against future milestones over the next 12 months, which are likely tied to sales. Of course, this provides some pros and cons. For example, merchants with a slow month do not have to worry about the monthly loan payment coming due (along with other monthly obligations). Conversely, the payback mechanism does reduce margins on each sale, so merchants must account for the load as part of goods sold.

How does Shopify Capital help merchants?

As the saying goes “cash is king” which is basically why Shopify introduced the lending program. To encourage use of the lending program, Shopify highlights your pre-approved amounts in your admin dashboard.

“If you’re eligible for funding from Shopify Capital, then you’ll see a pre-qualified amount in your Shopify admin. If you click to apply, then it typically takes 2-5 business days for your application to be processed. Finally, if you’re approved, then you could receive the money in your business bank account within two business days.”

In addition to the geographic restrictions, Shopify only pre-clears merchants, so even if you operate in an authorized state, you still may not be eligible. Along those lines, the set eligibility requirements are private, so interested merchants must wait for the program to appear in the admin dashboard. However, for merchants looking for funding, Shopify offers cash advances, which are eligible in all states. For merchant advances, Shopify does set repayment terms aligned with future sales.

Shopify Capital can really help merchants in a pinch. For example, if a small merchant is suddenly thrown into the spotlight, they may receive a ton of orders, but lack the finances to pay for the raw materials. In the days of Instagram and Tik Tok influencers highlighting niche products, this situation is more frequently than one might expect. So, a merchant might relish the quick funding to source inventory and convert all of those sales into revenue and ideally repeat customers. Or, if a big order falls through, cash management might be an issue to meet payroll, so some quick funding will help keep your employees from revolting.

How does Shopify Capital help Shopify?

Shopify aims to help small businesses. From an easy to use e-commerce platform to supporting operational services, the company continues to offer programs for a varying customer base. For example, the Shopify API allows developers to create third party apps that are quite specialized. This helps companies scale and/or develop custom solutions to individual problems. Conversely, many small mom and pop shops can use the platform as a plug and play option to transition a traditionally brick and mortar business into an e-commerce company without an extensive technology acumen. At the end of the day, Shopify competes against the big players in the e-commerce space and its main target is Amazon.

For reference, the Wall Street Journal provides some background on the supporting services that Shopify offers to help merchants.

“Shopify Capital, for example, has lent small businesses $1.7 billion since it began. Shopify is building its own nationwide network of fulfillment warehouses, intended to compete directly with Amazon’s own juggernaut logistics operation. Additionally, Shopify has its own way to accept payments, akin to PayPal or Apple Pay, intended to make one-click checkout possible on any merchant that uses it. Shopify’s payments service makes up the majority of its revenue.”

Is Shopify Capital Right for You?

All in all, the decision to seek funding from Shopify varies for each merchant. The ease of access helps certain merchants with low credit or in need of a quick sum to cover unexpected expenses. However, repayment terms can be confusing and likely more expensive than conventional small business loans.

Because Shopify caters to so many types of businesses, not all of their programs are right for every merchant. Based on the privacy around eligibility, Shopify Capital is more of a niche product with certain use cases (like the merchant advance program). However, if it fits your needs, then fast access to cash is certainly a major benefit.