Shopify Funding Decisions Are an Early Hurdle for Online Business

New businesses, whether they’re a new retail company looking to get into online orders, an individual with a small workshop or art studio looking to sell their creations, or a brand new e-commerce platform looking to start small and expand, seldom have the resources for a fully customized online sales platform.

Shopify is one of the most popular solutions, offering an online storefront with a suite of simple customization tools and solutions for handling inventory, payments, shipping, and other essentials.

One problem that often surprises these new entrepreneurs is the up-front stock investment, with the early expense of creating and stocking products far preceding any revenue sign. This leads businesses to seek out a Shopify capital loan.

Shopify attempts to offer a solution to this need in the form of Shopify Capital, which is connected to a seller’s Shopify account. Shopify judges an account’s eligibility for capital investment by offering a set amount of funding (as much as $2 million in some cases!) and then, if accepted, takes repayments as a percentage of the account’s sales over time.

While this will be the default solution for many, for others, this represents an additional burden on revenue during a company’s early life, when it is already at its most vulnerable and has the most need for revenue.

Shopify Capital is a debt financing in which a person or business borrows money from a lender and pays it back with interest over time. This is like the classical bank loan; for many, this is an archaic way to fund a company. In an age of crowdfunding and online preorders, to many new businesses, it is strange to turn back to such an old way of gathering capital. Yet, it has become the default solution for many Shopify-based businesses.

The fact that the capital is offered so readily upfront overrides that it impacts revenue, potentially for a very long time, and can leave a business unfunded down the road even if it reaches some level of success. This can raise the bar for ‘success’ early on, such that it isn’t enough to break even or even to turn a profit, and it must do this in addition to exceeding the early debt incurred to acquire upfront stock.

Alternative solutions to this problem include equity financing, in which an equity stake in the company is exchanged for capital investment. This will likely have an even more long-term impact, as the investor is now partially vested in the business and its long-term profits.

Many capital investors grow their wealth this way. Though this can have some benefit if the investor has their professional network and resources to tap on a company’s behalf, many young businesses turn to Shopify Capital specifically to avoid a loss of equity. Other solutions, like revenue-based financing and merchant cash advances, have similar problems.

Most modern solutions involve crowdfunding, specifically designed to collect revenue before the stock is accrued, but present a significant risk if unexpected expenses appear. Other businesses offer unique solutions or an alternative plan for a Shopify capital loan that provides smaller, continuous infusions of capital throughout a company’s early stages of growth.

Whatever solution a new business turns to—whether it’s the seeming default of Shopify Capital, a classic bank loan, a wise and well-networked capital investor, or a more modern kind of crowdfunding or loan plan—this early funding decision is one of the most important a new online business will make.

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