There are myriad reasons businesses seek additional funding, but they can all be pretty neatly summed up with that tired well-loved ol’ adage: You’ve gotta spend money to make money.
Financing allows you to get the money you need, to buy the things (and services) that will grow your business.
And it’s not just colloquial, either! Science agrees: SMEs that acquire external funding are more likely to grow and scale.
Does that mean you can start plucking money from the first tree that comes along, spend it on whatever you want, and build a successful business? Ta, we wish. The kind of financing you should pursue will vary depending on where you need to spend it, and there will always be restrictions – whether legal or needs-based – about where the money can go.
(Spoiler alert: none of them are good for all-inclusive vacations. Much illegal. Boo, hiss.)
Ahead, a primer on why you might want to consider financing, where to find it, and how to choose the right kind for your business.
Why Do Small to Medium-Sized Shopify Businesses Seek Funding?
To start, the average small business spends about $40,000 in their first year – but startup capital isn’t the only reason businesses explore financing options.
Operation costs often hike after an SME starts to turn a profit, making it a good idea to familiarize yourself with your financing options, regardless of your business’s stage of life!
Let’s get the annoying realities out of the way first. There’s no way to put this lightly: the number one reason startups fail is because they’ve run out of cash or failed to raise new capital.
Nowadays, securing financing/investor interest is, in most cases, a must. Even if you started with an enormous nest egg and have the economic savvy of Warren Buffett and the ruthless determination of Jeff Bezos (please, no), it’s always advisable to expect the best and prepare for the worst.
If done at the right time and in the right way for your business, seeking additional financing is an incredibly smart move to counter both bad luck (unexpected expenses) or more foreseeable difficulties (seasonal cash flow shortages). Additional funding to cover these circumstances could not only end up being a business-saver, but also a strategy for accelerated growth.
So, you know it’s wise to at least consider some external sources of funding for your Shopify store. Enough of the depressing and the boring. Time to get on to the fun stuff: where you can spend. that. cash!
Inventory, New Warehouse, New Product
A growing company = a growing inventory. Additional funding accelerates company growth faster than relying solely on purchasing more inventory from profits – particularly if you want to expand your product offerings! In any case, you’re not just going to need cash for the product, but also for a big enough space to put it. (💸💸💸)
It’s no secret strategic marketing is critical to success in eCommerce. Whether you opt for a strong email marketing program (you should), social and Google Ads, and/or some form of content marketing, research suggests investment in digital marketing campaigns is an essential factor in facilitating growth.
Hot tip: invest in an influencer. We know, we know – eye roll. But considering 75% of brands intend to carve out a significant influencer marketing budget for 2022, influencer marketing is something with which you’ll want to get both familiar and friendly, sooner rather than later.
While eCommerce presents a uniquely strong opportunity for combining automated and human elements in daily business operations, there are some tasks that just can’t (or shouldn’t) be exclusively farmed out to robots.
As your business scales, you’ll need real people to support you – whether that’s an in-house team to handle packing and shipping, a third-party distribution center, customer service agents, web designers and developers (or…ahem…agencies), operations teams, or marketing coordinators, additional staff will give you the bandwidth you need to continue growth…and they’ll all expect a paycheck.
New Web/App/Tech Design
Especially given the pivot to digital in the last couple of years, simply maintaining your tech ain’t gonna cut it anymore. You have to stay on the cutting edge. Whether your website needs some love (or your brand a refresh!), you want to start offering subscriptions, or you’ve got your eye on the mobile gravy train and want to build a dedicated app for your shop – surprise, surprise! – more investment.
Hiring an Agency
If you’ve got a long to-do list and prefer a more Jesus Take the Wheel approach, you may want to consider hiring a full-service agency to do some of the heavy lifting. Although it takes a greater financial investment up front, a reliable agency that provides a variety of services will act as a one-stop shop for all your needs, meaning you don’t have to pull together a fragmented team – or run yourself ragged – to accomplish everything.
Even better if you’re a Shopify merchant and can find an agency that specializes in all things Shopify!
(Oh, look…it us.)
How to Choose the Right Financing Option for Your Shopify Store
OK…the moment you’ve been waiting for – the financing options available for small to medium-sized Shopify businesses, and how to decide which to choose.
We’ll kick things off with some high-level notes on traditional funding options and why they’re…honestly kind of…meh.
Traditional Business Funding Methods
There’s some seriously salty literature out there about banks and eCommerce businesses, but it’s depressing and not the focus of this post, so let’s just say that small business owners have an 80% chance of being rejected for bank loans.
If you can get a seat at the table, it’ll likely take forever to get your meal (see: arduous application process).
If you can push through all of that, you’re likely to have some tummy trouble when you realize traditional banks are actual dinosaurs who have a hard time even seeing eComm businesses as a thing. (Ouch.)
Credit cards can be useful in the early stages of business-building or for a quick cash fix. However, fees, interest rates, and the human habit of disassociating that little plastic card from actual money can make them super risky – both for your business and your personal credit! Use them if you must, hopefully only in a pinch, but pursue other more sustainable avenues as well.
Friends and Family
If you have the connections, leaning on fam and friends can be a game-changer in earlier stages and for growing organic excitement. That said, it’s advantageous to save your personal asks for special occasions (launch, new product line, etc.) so you don’t continuously fatigue your day-one Stans.
VCs (Venture Capitalists)
Despite any potentially slimy associations you may have with VCs, they have meticulously cultivated an image of being the golden ticket for start-up success But like…is it true? Not exactly.
Applying for VC backing is an enormous commitment taking months to years. Plus, it’s estimated that just 0.2% to 1% of companies actually make the cut – and even if you’re part of that teensy percentage, you’re not guaranteed to be successful. (RIP Casper.)
All of that said, early-stage startups have lured some serious VC eyeballs in the last few years, so if you do want to venture (heh) into those waters, here’s a little checklist that will help you determine your likelihood of success.
You are most likely to be a good candidate for VC backing if:
- Your company is in a later stage round and has achieved meaningful traction.
- You’re a large DTC brand or well-known eCommerce brand with potential to exponentially scale. (VCs generally expect a return of 10-15x their initial investment, so keep that in mind when formulating your payback plan.)
- You’re ready to play the “grow at all costs” game and meet high performance metrics.
- You’re okay with giving up equity in your business in exchange for large sums of money. (FWIW, depending on how much equity you relinquish, doing so can allow your investors to stick their nose into any decisions that affect the business.)
- You have a flawless business plan and the projected ability to exit for $50M or more in 5 years.
Daunting, if you’re in the earlier stages of your business, but worth knowing about for the long term.
Alright, now onto some new-school options.
Modern Funding Options for Shopify Businesses
Yes, the Shopify goddesses have blessed some of their merchants with two pretty dope options: Shopify Capital’s merchant cash advances and business loans.
This invite-only program requires companies to be pre-qualified, though the exact eligibility requirements aren’t shared publicly. We know they’re based on your Shopify’s business history, which means you’ll need a pretty good track record. It goes a little like this:
- Application Process: You’ll receive an email from Shopify letting you know that you’re eligible to apply. The application process is – reportedly – a breeze. Hell yeah, minimal paperwork and no credit check! (For Shopify Capital loans, you’ll need to check if you’re located in an eligible state.)
- Amount Loaned: $200 - $1M
- Speed: Lightning. After receiving your funding offer, then reviewing and accepting terms, Shopify says your loan will be directly deposited in 1 - 3 business days.
- Repayment Terms:
Merchant cash advance: Repayment of the cash advance plus the fixed borrowing cost (which varies from merchant to merchant) is based on a “remittance rate” (percentage) that Shopify decides based on your risk profile, which is then deducted from your daily sales. Shopify explains it like so:
Shopify Capital might advance you 5,000 USD for 5,650 USD paid from your store's future sales, with a remittance rate of 10%. The 5,000 USD amount that you receive is transferred to your business bank account, and Shopify Capital receives 10% of your store's gross daily sales until the full 5,650 USD total to remit has been remitted. After you remit over 25% of your total to remit, then you have the option to remit the remaining balance in a single lump sum.
Easy peasy, yes?
Shopify Capital loan: Same concept, with the addition of 60 Day Milestones, each with a minimum payback amount. If that minimum isn’t met, Shopify simply deducts the difference from your account.
Which one is right for you? It’ll depend on how much cash you need, what you plan to use it for, and – of course – what Shopify thinks.
Payability’s Instant Advance
Alas, you haven’t received that magical eligibility notification from Shopify (boo!); or maybe Shopify capital just isn’t enough and you’re seeking some supplemental funding. Payability – an independent financing company designed especially for small to medium-sized eComm companies – offers what they call an Instant Advance, which is very similar to a merchant cash advance.
- Application Process: To qualify, you’ll need 9 months of selling history and at least $10k in monthly sales. The more demonstrated success your store has, the bigger your potential advance! Since Payability looks at your revenue instead of your credit, you can apply with no credit checks.
- Amount Loaned: The Instant Advance option lends out 75-150% of one month’s revenue and is only applicable to stores doing less than $500k in annual sales. Making over the limit? Go you! Payability has a solution for you, too – their Advance Line.
- Speed: 24 hours
- Repayment Terms Similar to Shopify’s terms, you automatically pay a percentage on future sales (between 12% and 15%), plus a weekly fee of .5% - 1%. Terms typically span 16 - 20 weeks, but the faster you pay off your advance, the more you save!
ClearCo (formerly Clearbanc) is another great option for Shopify brands.
- Application Process: First, merchants (corporations or LLCs only) must meet the requirements: a minimum of 6 months of revenue over $10k/mo across all sales platforms. Those who do can complete an application online, hook up all the relevant channels and accounts, and the AI software will generate an offer. No human decision making is involved – meaning absolutely no bias or “personal judgment.” It’s all about the numbers.
- Amount Loaned: $10,000 - $20M
- Speed: 24-48 hours
- Repayment Terms: Similar to Shopify’s terms, you automatically pay a percentage on future sales – but in this case, YOU, the merchant, get to decide what that percentage is. There’s also a loan fee of 4% to 12% of the total loaned, and is dependent on what you plan to use the money for.
Does your Shopify store have a killer idea that’ll speak to small-time investors?
Join one of the many crowdfunding platforms, where you’ll present your company to a large audience of new product enthusiasts. Crowdfunded merchants typically provide special goodies to their funders, such as discounts, access to exclusive items, or ability to reserve items if inventory is limited.
While crowdfunding circumvents many of the hassles associated with more traditional lending like credit scores, applications, and strict repayment plans, it can also introduce its own complications. You’ll be committed to structuring various rewards tiers, keeping backers updated on your progress, and ultimately, fulfilling your promises (lest you do major damage to your brand).
Whether reading this has made you want to run screaming into traffic, or excitedly open 30 new tabs brimming with eCommerce funding ideas, let’s take a little breather. It’s easy to get overwhelmed – or over excited – about raking in some extra moolah for your business. Before you dive in headfirst, take a moment to ponder the following:
- What do you need money for?
- How much money do you need? Do you have a detailed plan for how you expect to spend the loan?
- How soon do you need it?
- Are you at peace with sharing control of your business?
- Are you comfortable with taking on temporary debt?
Answering these questions will steer you toward different financing solutions. Once you think you’ve found The One(s) consider:
- How likely is it that you’ll be approved for funding? What is the backup plan if you’re not?
- How quickly will you receive the funding?
- How much interest will you have to repay?
- What are the terms of repayment?
- Are you required to put up personal assets?
You don’t necessarily have to pick just one financing path. In fact, many Shopify brands utilize a combination of funding options. It’s just about starting off slowly and finding the arrangement that works best for your unique needs and limitations.