How to Get a Loan to Fund Your Shopify Store Growth
September 6, 2022
While building and hosting a small business through Shopify isn’t as capital-intensive as a brick-and-mortar retail space, business owners should know that whether you’re just a startup or have a history of strong revenue, growth in the Shopify store space will likely require outside funding. Shopify is a massively popular platform. Statista shows that its revenues have grown rapidly from 2015, up to three billion dollars in merchant solutions in 2021.
Plus, the nature of an e-commerce business does rule out a few forms of funding more common in other businesses, like equipment financing. However, there are still plenty of funding options depending on your sales history, credit score, and industry. In addition, using Shopify as your e-commerce platform of choice means that you’ve got several opportunities other business don’t have at their disposal. Read on to learn about the different ways you can fund the growth of your Shopify store.
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Why Do Shopify Stores Need Funding?
There are five main reasons that an entirely online store might need funding. While these reasons aren‘t an exhaustive list, they do cover a majority of the situations in which these business owners might seek outside funding.
Inventory – In order to increase profit margins, entrepreneurs need a large stock of wholesale-priced goods to sell. In many cases, that means acquiring external funding to purchase enough inventory to satisfy the company’s daily sales and also ensure that you’ve bought inventory at a low-enough price to generate profit.
Marketing – Marketing campaigns can be expensive. There are a host of social media platforms to contend with along with email marketing, online ads, and even print advertising.
Startup Costs – When you’re a brand new business, there’s a variety of expenses that can dampen your cash flow and create financial issues. You might need to establish your company as an LLC or corporation. Certain industries, like food or liquor sales, might require licensing or inspection. You might find that you’ll need to hire employees or a web designer. And on top of that, the slow cash flow that comes with new business means that your company’s bank account might just feel too low to function.
Storage – There are two main forms of Shopify business. First, there’s what’s referred to as dropshipping. In dropshipping, the customer pays your company for a product, but you don’t actually keep any product on hand. You turn around and order the customer’s desired product from a supplier, who sends it directly to the customer. You don’t actually deal with the product at all during a drop shipping sale. On the other hand, you might order a large quantity of product from the supplier. Depending on what you’re selling, you may require a warehouse or other form of inventory storage to hold your products before they’re sold.
Working Capital – And then there’s the day-to-day cash your company needs to function. That’s called working capital, and it’s essential for every business. Many loans are taken out specifically for working capital purposes. Maybe some of that cash is spent on inventory, some on employee wages, and some on marketing.
Types of Funding for Shopify Stores
One option for any Shopify store in need of a quick infusion of cash is Shopify Capital. Shopify Capital is the company’s way of providing funding for Shopify sellers specifically and uses data through Shopify to make decisions on underwriting these loans and cash advances.
There are some downsides to using this program. Firstly, it’s exclusive to Shopify with unclear eligibility standards. You must have a Shopify account and take payments through the company. Secondly, it’s invite-only. If you’ve got a Shopify account and you haven’t received an invitation to use it, Shopify Capital isn’t yet available to you. They make decisions on who’s able to borrow through an internal algorithm taking sales figures and risk profiles into account.
But if you’re able to borrow through the program, they function like cash advances. You’ll receive an up-front payment and then hand over a percentage of each Shopify payment until you’ve repaid an agreed-upon sum. When sales are slow, you’ll make fewer payments. When you’re busy, you’ll pay more. It’s easy to set up repayments through Shopify itself, but there are additional third-party payment providers eligible to repay these loans as well.
The Shopify exclusivity is both this option’s biggest strength and biggest weakness. It’s fast – you might receive your funding as soon as the next business day after you apply. The application process is incredibly simple, as you receive funding offers in your inbox without even having to request them. But if your company makes money outside of Shopify too, that won’t be taken into account and can make your company appear to Shopify’s algorithm as having less in sales revenue than it does in reality.
If you’re looking specifically for using funds on Shopify and don’t mind that you may have to wait until your sales and risk profile qualify you for one of these loans, Shopify Capital is a great way to infuse your company with some cash.
Funding your fully online store through a traditional bank can be a good option if your personal credit and business credit are both top-notch. Banks don’t like to take risks; they prefer to find low-risk ways of making large amounts of money. To many more traditional lenders, a small fully-online store screams “risk” and you may find that you’re offered insufficient loan amounts at unreasonable repayment terms.
But if your personal credit is good, if your financial statements are well-kept and show growth and profit, traditional banks may be excellent financing options. They tend to offer larger loans at longer repayment terms that, when combined with the low-interest rates offered to those with good credit, can mean very inexpensive financing.
Lines of Credit
Lines of credit are a helpful form of business loans that help prepare your company for unexpected expenses. Business lines of credit work similarly to a business credit card. Depending on your creditworthiness, a financial institution will extend an offer of a line of credit up to a particular credit limit. You’ll only make monthly payments and pay interest on money borrowed up to that limit.
For a Shopify store, that line of credit can lie dormant until you have an unexpected opportunity to purchase a large amount of inventory. Or if you need a bit of extra working capital. Or if you need to pay an employee but you’ve had a slow month. Lines of credit don’t work the same way as the lump sums you receive in a traditional loan: spending well below your limit can mean that you’re keeping interest payments at a minimum while always having the capital you need at hand.
In addition to some of the more traditional small business loans discussed above, there are a few ways that e-commerce sellers can find financing in the online marketplace.
Merchant cash advances aren’t loans. Instead, a cash advance provider purchases a percentage of the business’s future credit and debit card sales. Each day, a certain percentage of each sale goes directly toward repayment of the advance.
The lenders make money off of what’s called a factor rate – a number that’s multiplied by the advance amount to determine the total repayment amount. If you borrow $20,000 at a factor rate of 1.3, you’ll repay a total of $26,000. If you pay that back quickly, you’ll find that you’ve paid a very high APR. But the fact that the payments come out of debit and credit card transactions means that slow days mean lower payments, which can be helpful. It should also be noted that Shopify Capital Merchant Cash Advances are available through Shopify Capital.
Inventory financing is the act of using your company’s inventory on hand as collateral against a loan. Some brick-and-mortar financial institutions are willing to take on inventory financing, but it‘s also a common form of funding among online alternative lenders.
Once You‘ve Chosen Your Funding Path
Choosing which funding option is best for your Shopify store is a major choice. Depending on which plan you go with, you might be facing new credit checks, a reduction of cash flow due to daily repayments, or a new monthly payment you‘ll need to keep in mind as you budget.
But whether you‘ve opted for a loan deposited into your business bank account, a line of credit ready when you need it, or a Shopify Capital loan through the host‘s own platform, the important thing to remember is that this funding should directly fuel growth. Whether that growth comes from marketing your business in a new or different sector, from the launch of a new product, or the hiring of an additional employee, growth means additional income, which is vital to any Shopify business.