Growing your Shopify brand comes with costs, and pay-per-click advertising doesn't grow on trees. Whether you need extra funds to cover growth expenses, seasonal gaps, or unexpected curveballs, it's important to understand your financing options.
One of the most widely used financing options for Shopify brands is Shopify Capital.
In fact, by 2021, there was about $10,000,000 of cumulative cash advanced by Shopify Capital to Shopify store owners like you (an increase of 87% from 2020).
To understand if Shopify Capital can be relevant to you, we’ll tell you a bit about how it works, how to understand if you are eligible, and what it means for your books and your taxes (hint: it works differently than other loans)!
What is Shopify Capital?
Shopify Capital is an ecommerce financing program that Shopify offers its sellers to enable you fast access to business loans and merchant cash advances.
If you qualify for the funding based on your Shopify sales, you’ll see an invitation in the Admin section of your Shopify account.
Shopify offers two types of funding:
1. Business loan
Shopify business loans are short term cash loans, similar to cash installment loans. They carry a fixed borrowing fee instead of interest rates.
Shopify Capital deducts a predetermined percent of your daily sales until the amount borrowed and the borrowing fee are completely paid off.
Every 60-day milestone, you’re required to repay 1/6th of the total loan (no matter your amount of sales), so that you’ll repay the entire loan balance within 12 months.
2. Merchant cash advance
Shopify's merchant cash advance is a bit different than a loan. It is an advance of cash against future revenue. This type of funding carries a factor rate instead of an interest rate.
A factor rate is similar to interest but is expressed as a decimal that shows how much extra you will pay for a loan. For example, if an advance is $10,000 and the factor rate is 1.13, you multiply the two numbers to understand the amount you will need to repay, in this case, $11,300. Unlike interest, the factor rate applies to the original funding amount and not to the remaining loan balance.
In order to collect your payments, Shopify Capital deducts a predetermined percent from your revenue each day. In this case, there are no milestones and no defined term for repayment.
Shopify Capital highlights
Shopify Capital is a very common funding alternative for eligible businesses.
Here are the main highlights:
- Funding ranges from $200 to $2,000,000.
- Shopify targets Shopify sellers only.
- Funds are deposited directly into your business bank account.
- Shopify offers loans by invitation only if you meet certain metrics.
- The terms of each loan invitation are fixed and cannot be negotiated.
- Shopify uses your sales history and information on file to make the process fast and easy.
- Payments are withdrawn automatically by Shopify on a daily basis as a percent of your daily sales.
- For merchant cash advance loans, after you remit over 25% of your total repayment amount, you have the option to remit the remaining balance in a single lump sum.
- For business loans, your repayments can be anywhere between $20 and the full remaining balance, but you must repay at least 1/6th of the total loan every 60-day milestone.
In order to be eligible, your store needs to:
- Be located in the United States, Canada, or the United Kingdom
- Have a low-risk profile, according to Shopify
- Enable Shopify Payments or another third-party payment provider
- Process a certain amount of sales
Shopify doesn’t explain what exactly is meant by a “low-risk” business profile, but it is likely related to things like your industry and history of sales.
Note: Shopify business loans are currently limited to Shopify stores located in a handful of US states, while Shopify merchant cash advances are available in all US states.
Pros and cons of using Shopify Capital
Let's review Shopify Capital's main pros and cons.
I know there are people out there who don’t get as excited to discuss accounting as we do (GASP!). But, before you undertake a major eye roll and skip this part of the article, remember that understanding the accounting treatment of your business decisions is key when managing your own business. Taking one type of loan over another can impact your financials and your taxable income.
Shopify Capital charges a flat and fixed fee instead of interest. The total fees are due regardless of the time it takes to repay the advance. In other words, even if you repay the borrowed amount early, the fee is not reduced.
How does Shopify Capital impact your books?
The specific accounting treatment of the fees will depend on whether you manage your books under the cash or accrual method of accounting:
Since you have to pay the total fees even upon an early repayment, on Day 1 of receiving the funds, record a short-term liability on your balance sheet for the amount borrowed as well as the fee owed.
For example, if you borrowed $19,000 with a fee of $1,900, record a short-term liability of $20,900 on your balance sheet.
Now the more complex question is when will those fees hit your income statement?
There is no clear answer to this question under the traditional accounting standards. The answer depends on whether you received a business loan or a merchant cash advance:
If you report on a cash method of accounting, you should not record a liability on your balance sheet for the fees. Rather, the fees will hit your income statement only upon their actual payment. In other words, every month your overall repayments will be apportioned between financing costs and repayment of the liability and you will be able to get a deduction each month for the financing costs.
Does Shopify Capital impact your taxes?
The timing of when you recognize the financing costs in your P&L can impact how much taxes you need to pay to the IRS. If you recognize the full amount of financing costs during the tax year, you get to deduct the whole amount from your taxes. Cha-ching!
On the other hand, if you recognize the costs over the life of the loan, you may only be able to get part of the benefit during the next tax year. The timing of the tax deduction will depend on whether you file taxes under the cash or accrual method of accounting.
If you use the accrual accounting method in your tax return, under the merchant cash advance the total amount of fees should be tax-deductible and reduce your taxable income even before you've actually repaid the full advance. Such expense acceleration may decrease your actual tax payments so you can invest the extra cash to grow your business faster.
For business loans, on the other hand, the fees should be tax-deductible over the course of the loan. This means that if you take out a loan during 2022 but only fully repay it in 2023, you will be able to deduct part of the financing costs in 2022 and the remainder in 2023.
If you apply the cash accounting method to your tax return, the fees should be tax-deductible only upon their actual payment.
Final thoughts on Shopify Capital
Scaling an online brand requires marketing spend, inventory costs, product testing expenses, etc. As a business owner, you are constantly asking yourself what you need in order to get your business where you want it to be - whether that means surviving tough times or thriving and growing your brand.
There are many different funding options out there to help you grow your Shopify business. If you meet the eligibility criteria and receive an invitation, it could be a great option to receive cash quickly.
How can you evaluate Shopify Capital against other financing options?
It's important to find the best financing option for your business by comparing one universal rate to understand the real costs of each alternative.
While rates and fees are often offered differently from different lenders, you can check out our free ecommerce loan calculator to calculate the annual percentage rate (APR) for your funding options, compare different APRs (e.g., Shopify Capital, ClearCo, Paypal Working Capital), and choose the best option for you!
We are a technology company providing automated end-to-end accounting services to ecommerce businesses. Our system connects to your apps, syncs all your data, and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*