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Shopify Capital

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137 pointspeterjancelis42 comments

> "Merchant cash advances do not have an interest rate. Instead, Shopify will purchase a set amount of your future receivables at a discount."

Their page never specifies a "discount" rate and only show the 10% remittance rate. This makes their example table at the bottom near fraudulent because the "daily revenue" column is already discounted. I'd bet their discount rate is the same ~13% it was six months ago [src].

They know your revenue history, so I expect they're offering something which will likely take you 9-12months to pay back at the remittance rate (10%) based on your projected revenue. Note since this isn't a loan, if you pay it back early by growing revenue, Shopify still makes the same returns (13% discount rate) on their capital. Good deal for them, likely comparable to credit card rates for businesses, but since it's cash it's more flexible (pay employees, payoff loans, brides, etc).

[src]: https://twitter.com/seobrock/status/669269206584553473

How is this functionally different from a loan? It appears to be identical.

There's no interest that grows over time. You pay back the same amount.

Shopify is betting that they can predict when you'll pay it back, then set a discount that makes them more money than time-based interest. If they lose, they still get their money back eventually, and if they win, hey, that means you grew faster than expected, which is great for everybody.

I don't believe there is a requirement that interest on loans be compounded or time-sensitive.

I think you are correct, it is just that it is actually required that you do charge interest.

However, I worked with a woman who was Jewish. She showed up in a new car one day and we went for a ride.

I asked her how and when she went and got the car.

She said "oh I got a loan from the Jewish community" or something to that effect.

I inquired what that meant; she said that she was able to get a loan from some Jewish social circle and she didn't have to pay interest because she needed someone else from the Jewish circle who was willing to back her and pay the loan of she failed to pay.

I didn't ask what the consequences were if she failed to pay - but she just mentioned that "if you know Jewish people... Getting money isn't hard"

Unrelated parties are not required to charge interest on loans. (However, interest generally will be imputed on loans between related persons.)

> Unrelated parties are not required to charge interest on loans. (However, interest generally will be imputed on loans between related persons.)

You're never required to charge interest, but in most situations if you receive a below-market loan (from anyone other than a spouse) over $10,000 the IRS will impute interest.

Interesting, I was loaned enough money to buy a house from a family member, and I was required to pay them back with market interest... Thus my comment was from experience - even though I may be wrong?

Instant approval with no docs but much worse hidden rates

According to the marketing you must have an existing relationship with Shopify and be pre-selected by Shopify to "access" a pre-approved amount.

You make a good point point but it was hard to understand the way you phrased it: I think you mean that listing a discount rate (or any kind of pricing) wouldn't make sense because it is customer specific (history/existing relationship) and will vary accordingly?

I mean to say that the approval isn't really instant, as Shopify has already examined your cash flow and made a specific determination to market the offer to you.

The claim that no docs are required is also specious, as, again, Shopify already knows your personal information and real-time cash flow.

I would assume that the pricing is customer specific, which would make it more difficult to publicly advertise a price.

Merchant cash advances are technically not loans because you're selling future receivables. The advantage is that these transactions are not regulated like loans and importantly, are exempt from usury laws. That's why annual effective interest rates on MCAs can exceed 100%

I find the way these programs are presented (Square has a similar offer) to be opaque to the point of dishonesty. How am I able to compare this "interest free" loan with a small business line of credit from the bank?

They offer a chart of what repayment looks like, but no "total interest paid" descriptions. I can't help but worry that the way these are designed is more about skirting regulations and confusing borrowers than they are about offering people something genuinely useful.

Reminds me a little of cheque cashing shops... Find a group who aren't able to access mainstream financial services (in this case small online sellers) and charge them excessive rates for your "generous" offer.

How am I able to compare this "interest free" loan with a small business line of credit from the bank?

If you're able to get a small business line of credit from your bank, take that, it will invariably be superior. Sadly, that product has virtually disappeared from the marketplace for small businesses with revenue less than ~$1 million. The underwriting costs are too high, the product is too risky, and the revenue potential is too low. The bank will, instead, steer you towards credit cards. Credit cards are a wonderful product but they don't substitute for the need.

There exist a bunch of alternative lenders who are eating this space up with pricey-products-which-actually-get-issued. OnDeck gives fairly uncomplicated lines of credit, for example. Their stock offer is 36%. (I have one, and occasionally use it.) Kabbage (love the name) does a merchant cash advance with implied APRs which are even higher. There are more costly options still, including traditional hard-money lenders and merchant cash advance providers.

This offering is closest in character to Paypal Working Capital.

SBA loans are not that onerous -- go to a credit union (https://www.sffirecu.org/business/loans/small-business-admin...) instead of a big bank and you can get it done.

A Chase (or whatever) business card at 13% is still better than this since you can pay it back early.

Sample size of one, but I have friends who run a small shop doing trade work (earning far less than 1m/year) and they were able to fairly easily get access to 10-20k of loans with interest rates in the <10% ball park (don't know exact numbers, also not mine to share). So to hear that kind of loan has "virtually disappeared" is surprising.

Frequently those 10% loans are for, say, 6 month payback periods so the effective APR is over 20%.

Also, the typical borrowers tend to have at most a rudimentary knowledge of finance so they don't understand the terms of the loan. Sometimes they don't even bother reading the loan agreement. This makes anecdotal evidence extra unreliable.

Generally interest is annualised and measured in APR.

Actually, on these types of loans, generally not.

For example: https://squareup.com/capital

I don't really get how they arrive at their numbers but on first glance it looks insane. On the $10k loan with the $1,300 fee. If you had daily sales of $1,000 you'd pay the loan off in 100 days making the APR somewhere around 50%.

They are frequently fee-based, not rate based. And are frequently less than a year with the rate being highlighted, not the APR.

Yup, this seems kind of predatory. Instead of honestly answering what the interest rate is or give an equivalent they wave it away with jargon. Answer after answer is just jargon and more jargon. They don't even show what the total amount paid back is! They instead show very clearly they keep drinking your sales until they decide to stop.

Cash flow sweeps are pretty common in commercial banking, even in much larger, market rate, respectable loans. That said, the opaqueness of this product is disconcerting. It seems designed to confuse desperate people.

It appears you are 'chosen' for inclusion into the opportunity based on your business history with Shopify and that they will present you with specific details once you enter the processes. Just evaluate it alongside your local bank's proposal.

>>opaque to the point of dishonesty

I suspect the fee is not the same for everyone. They probably have some way of judging risk. Which would explain the secrecy.

It's not the lack of specific numbers that I find the most disreputable, it's truth-bending statements like "Merchant cash advances do not have an interest rate."

Merchant cash advances (a sizable, although definitely not huge, segment of lending) do not have an interest rate, they have a factor rate, which is an entirely different thing in finance. The factor rate is simply a multiple on the amount advanced (money that the borrower gets now) in order to determine the constant amount that must be repaid to the lender, the right-to-receive amount. Calling it an interest rate would actually be dishonest.

And the factor rate, I assume, varies based on the amount, and the credit risk of the borrower. Which is why it isn't stated up front.

Also, they say if you don't have any sales, then you don't remit anything

That's a default though

Where do they explain what happens if you don't repay?

In case any of you think this is something new, its not. It's called Factoring and its been around since the renaissance:

https://en.wikipedia.org/wiki/Factoring_(finance)

Of course, when Shopify, Square, and PayPal put their startup-land spin on it and call it "Capital", it sounds cool and new (the fact that they wont use the term says a lot). IMO factoring should only be considered as a last resort of capital or when you have some large/long-term enterprise contracts and need to ramp up production fast (eg Wal-Mart wants 100K of your widgets or the State of CA just ordered $4M worth of software from your 3-person shop). Even then, there are usually other sources of capital with better terms available.

I used to work for a cashflow factor in the late 90s. It's a legit business need, but with few legit players. Almost like payday loans for business. It's due for a brand uplift and some visibility.

I always associated factoring with paying someone to handle Accounts Payable at a big company (which is your customer) with an Accounts Payable dept that is difficult to deal with for a small business (that don't have Accounts Receivable). These factoring companies are handed invoices for services rendered and when they collect they give you ~96%.

This is different because Shopify is the storefront/ payment processor, they can collect money when the product is bought; they don't have to negotiate with sophisticated people on when the payment can be made. Shopify is fronting the capital before it's even been collected, where this is not the case in the typical factoring company's business.

Here in the UK, every other fintech startup seems to be based around factoring or invoice receivables financing...

If you're a business which experiences cashflow issues, I'm suspect it works out cheaper than a revolving credit facility or a series of regular loans, but like any flexible credit facility, it's a lot cheaper if you don't need to use it at all.

I wonder what happens if a company goes bankrupt. Does the merchant cash advance contract give shopify some claim to the company's assets?

The most details of these products out there is at https://www.paypal.com/us/webapps/workingcapital/tour under the Pricing tab. As a merchant, you agree ahead of time to a loan amount and a withholding rate, and depending on those parameters and your sales volume, you're given a fixed fee that is tacked onto the loan principal. Repayment then occurs by the lender withholding some amount of the payments that you receive until the principal + fixed fee gets paid back.

As a one-time/infrequent shot, it's actually a really nice lending product in that it's not going to cause undue strain on your business if your sales start to flag since the payments go down along with it (and because the total interest you pay is fixed, the implied APR is actually better that way). Where they can become problematic is when a merchant keeps rolling one after another of these since then you're paying a high price for credit and would be better off with a small business credit card or line of credit.

Definitely would like to see more transparency with these either way though. When used properly, both the lender and the borrower win, and so I find it odd that lenders try to obscure the details.

Looks very similar to Paypal's offering: https://www.paypal.com/us/webapps/workingcapital/

Beware though. While they pitch it as "no interest, just a fee", the typical effective APR of a PayPal Working Capital loan is between 15 to 30 percent.

I suspect this has similarly high fees, since they seem to be hiding the information.

This is a huge thing on Wall Street at the moment.

Bloomberg wrote about a couple of guys that started such a business and got bought for (maybe, exact terms not stated) $60 to $100 million.

http://www.bloomberg.com/news/features/2015-10-06/how-two-gu...

As someone who has built a lot of saas products off Shopify this makes total sense. Square, Amazon, and PayPal have already gone down this path and proved its highly profitable. I would be curious if Shopify is white labelling a banks offering or if they are making loans a core competency. If the later then its really dangerous for this area is starting to become regulated and is shifting quickly. This risk is one the reasons Square moved away from doing it themselves to actually using third party banking partners to make loans. Also as many of those in the industry already know large loan providers are starting to anticipate a shift in the economy and are moving to invest in collection services rather than sales. If you don't have a competency in making good loans/ collections then you can get in trouble in a down market. That said I do love how companies like Shopify are figuring ways to empower more entrepreneurs to start and grow their businesses. I personally would have though it would have been better for them to open store processing data to qualified third party lenders and provide them an easy way to evaluate, price, and sell loans. This competition would have driven down the price of loans for businesses and Shopify could focus on making great software and just taking a cut off an area that isn't their core focus. Similar model to what has worked for them in other areas outside their core focus (i.e. apps/ theme/ experts market).

Predatory lending as a service.

merchant cash advances have been around since before the internet. it is an EXTREMELY common marketing tactic in merchant services.

so shopify sells merchant services, and uses one of the most common marketing tactics. and they made a fancy landing page.

it's a tactic to prey on desperate businesses where they can be taken at the source of their money before it's even put into their account.

I hope Stripe borrows this idea, I think it's a great win-win for all parties.

high APRs on this type of thing

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