May 30, 2024

How Shopify Capital works for ecommerce businesses looking for funding, loans, and other types of financing

Kristen Campbell

What is Shopify Capital?

Shopify Capital is a popular option for funding ecommerce businesses. Shopify funding allows merchants using Shopify in the US, Canada, the UK, and Australia to apply for up to $5M in funding.

Funds are provided by Shopify Capital and are delivered to Shopify merchants as a lump sum. In turn, Shopify charges a fixed borrowing cost also known as the cost of funds. The merchant pays back the amount Shopify provided them, plus the borrowing cost. Payment structures can vary, with Shopify providing merchant cash advances (MCAs) and merchant loans where it collects a fixed percentage of sales on a daily basis, or more traditional lines of credit where it collects a monthly payment.

The lump sum plus the cost of funds are what the merchant will pay back overall. In an example scenario, Shopify might advance a business $10,000 principal plus may advance a $1,500 fee (please note this example is not directly reflective of Shopify’s fees). Now, the ecommerce business with the advance must repay $11,500 through a fixed percentage of sales revenue each day.

Personal credit checks aren’t required but Shopify may consider factors such as business credit, sales history, and revenue from prior years before offering capital. Failure to meet minimum payment thresholds over the course of the advance can potentially result in default

Shopify Capital offers MCAs in the UK, Australia, Canada and the US, while also offering term loans and lines of credit in the US (excluding some states). Specific terms and product structures vary depending on location and eligibility.

Why might ecommerce businesses consider Shopify's funding? 

Ordering inventory, paying employees, and setting up a marketplace account or online storefront all require funds – and many founders do not have the cash on hand to front these costs. Fortunately, founders in 2024 have access to a number of options to cover costs, such as Invoice Funding, Shopify Capital, traditional lenders, other financial technology (fintech) companies, private capital, and personal loans.

Capital will come with different terms depending on the lender and product structure, and will depend on factors such as business growth, revenue history, monthly expenses, monthly payroll, creditworthiness, or the business’ ability to cover its loans (credit utilization).

Watch this overview of Shopify Capital loan amounts, payback amount, and more by LedgerGurus:

Should your ecommerce business consider any type of funding, loans, or financing to support scaling?

Ecommerce business owners shopping for capital should first consider why they need funds. Is it capital for inventory or another tangible asset that is likely to see a return on investment? An investment in equipment or specialized staff? Intended to cover digital ad spending or growth in production? Support a business through a downturn?

Financing or other funding options for purchasing physical assets (say, a building used as a manufacturing plant or a dozen industrial grade sewing machines) are typically cheapest when secured by the asset itself. Other business operating costs, like marketing, could be more effectively covered by alternative financing options.

Reasons for getting working capital will vary, and the ‘best’ choice for each business will depend on its circumstances. Lenders and financiers are going to price the capital according to risk. In most cases, new businesses with no assets will pay more than well-established businesses with consistent revenue. Sometimes, the cheapest money seems like the best fit and other times, it’s clear that the cheapest financing option is not the best option when it has long delays or personal guarantees. Most important when making your choice of capital is understanding the capital’s true cost – taking into account opportunity cost, borrowing fees, and other factors.  

Not all capital providers charge interest, but lenders will always charge a cost for their capital in some form, and the time value of money always exists.  Borrowers can use a rate calculator to determine APRs when fees, interest rates, or other lending terms aren’t crystal clear. The goal of such tools is to provide borrowers an ‘apples to apples’ way to look at various capital options. 

Is Shopify’s capital a good idea for ecommerce businesses?

Shopify’s funding is a good idea for ecommerce businesses that need money fast in order to take advantage of an event, like Prime Day, or when those ecommerce businesses have already built significant credit with Shopify. Using Shopify Capital may not be the best option during periods of high sales. Since Shopify collects payments by collecting a percentage of daily sales, periods of high sales (such as, special order or flash sale events specific to your store or broader events, like Black Friday Cyber Monday) could mean payments are larger - as per Shopify, “On days you sell more, you pay back more. On days you sell less, pay back less.”

Fans of Shopify’s capital solution also highlight that Shopify MCAs are unsecured, meaning borrowers don’t have to pledge collateral or put up their assets to guarantee it.

Clearco is an alternative to Shopify Capital for ecommerce business

One way ecommerce merchants can cover costs of business is with Clearco’s Invoice Funding, where they obtain capital to pay for inventory and other specific costs. Clearco connects directly to your Shopify store in addition to your other online storefronts to gather revenue data and determine how much it will fund a customer’s business.

Some of the differences that Clearco offers to better support ecommerce businesses with their capital decisions include:

  1. You only use Clearco when you need it: With Invoice Funding, you tell us when you have an invoice you need to pay, and we provide the capital to pay your invoices or receipts. 
  2. You don't begin payments on the Clearco advance until you use it: With Clearco's Invoice Funding product, you only begin paying Clearco once you've actually used the capital to fund your invoice.  
  3. You don't pay fees on Clearco capital until you use that capital: Clearco only charges you fees once we've funded you so you can pay your invoice. 
  4. Your revenue accounts are not debited daily: Weekly debits allow Clearco customers to plan and manage their cash better.
  5. Your payment amounts are “fixed”: Know what you’ll pay with Clearco as the amounts are based on business revenue up to a capped amount. Traditional revenue-based financing (RBF) products’ payments are based on a so-called "remittance rate" which is uncapped, meaning customers commit to paying a fixed or set percentage of their daily revenues.  If your revenues grow rapidly, that means you’re paying more.

Clearco works alongside Shopify Capital for ecommerce business

Clearco is happy to work alongside your ecommerce business’ various capital providers to improve your relationship with your banks or achieve the exact funding that works best for your ecommerce company. If you use Shopify Capital products, you can still use Clearco’s Invoice Funding for inventory, marketing, shipping, logistics and other types of invoices or receipts. Many of our Clearco customers are Shopify Merchants.

Clearco makes it possible to connect Shopify as one of your sales platforms to verify your ecommerce revenue. During the signup process with Clearco, you need to connect at least one ecommerce sales platform that indicates you are generating at least $10,000 per month in revenue consistently over 12 or more months. These connections will allow our system to generate your funding capacity and Shopify is one of the connections that Clearco can use.

Get funding for your ecommerce business

Ecommerce businesses need funding for everything from staying afloat during slow seasons or financing growth for increased revenue. Shopify capital is one of the many alternative funding models out there for today’s ecommerce entrepreneur – additional access to capital for growing ecommerce businesses is a positive all around!

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Kristen Campbell
Content Writer

Kristen is the co-founder and Director of Content at Skeleton Krew, a B2B marketing agency focused on growth in tech, software, and statups. She has written for a wide variety of companies in the fields of healthcare, banking, and technology. In her spare time, she enjoys writing stories, reading stories, and going on long walks (to think about her stories).