Did you know that users of the Shopify platform can receive financing of up to $50,000 in the form of a cash advance from Shopify? It’s true. Shopify calls it their ‘Shopify Capital’ program. It is a program through which they invest in their users by loaning them money in return for receiving a share of their sales until the amount borrowed, plus interest, is repaid.
A seller deemed eligible for Shopify Capital would receive the amount borrowed through direct deposit into his or her business bank account a few days after applying. Beginning the following day, Shopify would automatically start deducting a certain percentage of the retailer’s daily sales with that money going toward paying off the cash advance. Daily deductions continue until the entire debt is settled; there is no time limit, by the way.
Shopify Capital is a good way to build store inventory. Sellers can use it to start a new store from scratch, expand into other areas, or increase seasonal inventories. Here are three important things to know before agreeing to use Shopify Capital:
1. Shopify Capital Is Structured as a Cash Advance
The money received from the program is legally structured as a cash advance rather than a business loan. As such, it may not subject to all the same regulations that govern standard business loans. This is important to know. Before you agree to participate in the program, you should be sure to understand your rights and responsibilities under the Shopify Capital financing agreement.
If you are eligible for the program, you should have already received an e-mail from Shopify, provided you have already set up your store. That e-mail contains all the vital information you need to know about your financing options. If you have not received an e-mail, that means you are not eligible. You can always contact Shopify and ask about eligibility if you’re not sure.
2. Rates Are Determined by Risk
Shopify charges a ‘factor rate’ on cash advances; let’s say 2% as an example. The amount of the borrower’s daily sales taken to pay down the debt is referred to as the ‘remittance rate’.
Let’s say you borrow $8,000 and agree to repay $8160. Shopify may assess a 12% remittance until the entire bill is paid. They would then deduct 12% of your daily sales for as long as settlement takes. What you need to know is that risk profile determines both factor and remittance rates. Though Shopify does not explain this risk profile, we assume retailers who present a higher risk are subject to higher rates.
3. You Must Use Shopify Payments
Retailers must use Shopify Payments as their default payment gateway in order to receive a cash advance. This is the only way Shopify can deduct from daily sales to recover their cash. Only after a cash advance is completely paid off will a retailer be able to deactivate Shopify Payments in order to switch to a new gateway.