
Shopify Capital - peterjancelis
https://www.shopify.com/capital
======
notpeter
> "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](https://twitter.com/seobrock/status/669269206584553473)

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

~~~
trjordan
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.

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

~~~
samstave
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"

~~~
gamblor956
Unrelated parties are not required to charge interest on loans. (However,
interest generally will be imputed on loans between related persons.)

~~~
aianus
> 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.

~~~
samstave
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?

------
kennywinker
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.

~~~
patio11
_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.

~~~
kennywinker
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.

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

~~~
HappyTypist
Generally interest is annualised and measured in APR.

~~~
pbreit
Actually, on these types of loans, generally not.

For example: [https://squareup.com/capital](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.

------
callmeed
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)](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.

~~~
aristus
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.

------
rcar
The most details of these products out there is at
[https://www.paypal.com/us/webapps/workingcapital/tour](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.

------
tyingq
Looks very similar to Paypal's offering:
[https://www.paypal.com/us/webapps/workingcapital/](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.

------
patrickg_zill
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...](http://www.bloomberg.com/news/features/2015-10-06/how-two-guys-lost-
god-and-found-40-million)

------
oisino
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).

------
josep2
Predatory lending as a service.

------
tkjef
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.

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

------
vincefutr23
high APRs on this type of thing

