Shopify Capital Review | What is it and how does it work?

0:33 How the offer gets calculated

I spoke with a Shopify Capital specialist and he provided some insights. Let me tell you about those.

They look at the data from your Shopify store and use AI to determine how much to offer. Now, they're unclear on what goes into this, but I can make some guesses. I would assume that they're looking at sales over time. They're comparing to prior periods. They may be looking at sell velocity. They may be looking at different metrics on what's being sold. But it's somewhat of a black box, because Shopify has lots of data.

They're going to be looking at trends across various accounts, so they probably look at your account versus comparable stores. They're going to be looking at macroeconomic trends, like government interest rates, inflation, et cetera. But it's this big black box. You don't know how it works. They just are crunching your data to come up with that offer.

There will typically be different options of lending with different repayment rates, which I'll go through later. I was told the rates are determined by the factors that their AI looks at, but you'll see that the rates change as the size of the loan changes. These loan offers will change, so what you see one day might change the next.

1:46 Where it's available and who qualifies

Now, key note on Shopify Capital, it's only available in Canada, the UK and select states in the United States. The state will be based on the business from which you're operating from, which is probably the one that you were putting in Shopify for.

I wasn't able to find a list of states on Shopify's website, but a recent Fundera article, as of June 2022, listed these 14 states. So if you're in one of these 14 states, awesome. If you're not, wait and see.

Shopify Capital is available to eligible merchants using Shopify Payments, as well as eligible merchants using third party payment gateways. That said, they recommend Shopify Payments as they state they'll have more insights to give an offer. Not sure what that means, but they're probably going to take the data from your payment processing and calculate that as part of the process. My guess is they're looking at returns, chargebacks, that type of stuff, and if they're using Shopify Payments it's a little bit easier to crunch that data.

Not every store will be eligible. So if you don't see an offer, it means that Shopify doesn't feel like you're qualified. And again, it's a black box, so you don't know.

3:02 What makes it different

There's some interesting aspects of Shopify Capital. First, they don't require personal guarantees or credit checks. This is great for newer businesses, or those with poor business or personal credit, because traditional lenders will usually require those things. That said, it probably means that you're paying more for this loan, and you'll see that when we go into the terms.

The Shopify Capital specialist I spoke with says they don't like to have loans out for more than 10 months, so be aware of that, and that will probably go into the calculations if you look at the numbers.

Now, an interesting aspect is that at 85% of loan payback, a merchant is open for more funding and the loan doesn't get stacked. So there's no double payback rate. Just means you can create an additional loan and pay it back separately.

Loans will be deposited within three to five days of a request being reviewed and approved. So even though you have that offer, they're still going to go back and probably do an additional review process, which again is a little bit of a black box.

4:04 Walking through a real offer

All right, let's dive in and look at the details of an offer from one of our businesses, Solé Toscana. This is a business that we own, so we're able to show you some details.

If you're eligible for Shopify Capital, you're going to find an offer on your homepage. If you scroll down in your store, you're going to see something like this. Let me go ahead and click on this. Here's my offer. You're going to see three different loan amounts, you're going to see three different daily sales repayment rates, and obviously three different amounts of interest. If you want to go ahead and proceed with the loan, you click on the request button and go through the process. But let's break down the numbers and see what this means.

4:49

All right, let's break the numbers down. So I've got my loan amounts, I've got my payback amounts, and I've calculated the interest for each of those offers. And then I've calculated what would the interest as a percentage of the loan amount be. So you can see the more that you're taking out, there's more risk, and therefore the interest rate is higher.

I have assumed, let's say, it's a 10 month payback. This is what the effective APR, annualized percentage rate, would be. Now in reality, based on the velocity of your store, you're probably going to pay these back faster, and so your APR could be effectively higher. So you've got to consider that. These are not cheap loans.

5:35 How the rates compare

Let's take a look at and compare these rates to what we're seeing right now at this time, which is July 2022.

All right, let's compare these rates, which are around 9 to 15% APR. Compare that to say an SBA loan. Again, this is being recorded June, July 2022. You can see that SBA loan rates are 7 to 9%, or 7.5 to 9.5%. The difference is the length of the loan and the amount of the loan. So these are definitely cheaper loans.

If I were to look at other things like lines of credit, you would find that they will be probably somewhere in between. They could be higher than a Shopify loan. Lines of credit can be all over the place, so take that into consideration.

6:30 Why sellers use it and when it's worth taking

The reason why a lot of sellers do Shopify Capital, or other revenue based loans, is simple. Traditional banks don't like to lend where there isn't collateral like a building or a vehicle. Inventory can be an exception, but that's like the only asset that you can lend against with a traditional ecommerce business, unless you have those other types of assets, which a lot of them don't.

Traditional banks will look at a lot of information like business credit, personal credit, business financials, et cetera, and Shopify Capital does not. Traditional banks will likely require personal guarantee, meaning you are personally on the hook to pay back the loan if the business cannot.

For all of these reasons, Shopify Capital can be a good option, as it is a much simpler loan to obtain as well as pay back.

7:13

That said, there are costs of the loan, as we saw. I would be very thoughtful on using Shopify Capital to grow your business, because you're going to pay a lot to do that. And you probably want to look at more traditional lending. That's going to come at a lower cost of capital over time.

You want to make sure that that lending is driving growth and or profitability, either in the short term or the long term, or this loan can become a burden for you. With this in mind, Shopify Capital is best used for critical things like inventory purchases or advertising that has a quality return on ad spend.

So bottom line is, can be useful, but be very thoughtful about how you use Shopify Capital.

All right. If you found this video helpful, like it, ask me a question in the comments, I'm happy to answer it. And be sure to subscribe to our channel where you'll get more content like this. And if you need help with your ecommerce accounting, reach out to LedgerGurus via the link below.