Shopify now offers small loans to help entrepreneurs grow their businesses. Here's how to skip the bank and secure a loan through services like PayPal, Square, and Stripe.
Payment processors and ecommerce platforms such as PayPal, Square, Stripe, and Shopify, offer business loans and financing that can range from $200 to more than $500,000. These loans are typically based on the sales a business makes through the platform, so they're often easier to get than traditional bank loans that require a credit check. Cupcake shop owner Kelly Kandah started her bakery with personal savings but said she wasn't able to expand as quickly until she started using loans through Square. Here's how she did it and how small business owners can apply for similar loans. Click here for more BI Prime content.
When Kelly Kandah started her first cupcake shop, Colossal Cupcakes, she hadn't fully realized what she'd gotten herself into. Until she saw the line out her door on opening day. Kandah, 33, said she knew cupcakes were having a moment, based on all the shops she'd seen popping up in New York City, where she lived for a year. But she hadn't prepared for such high demand in her hometown of Cleveland, Ohio. She had a couple KitchenAid mixers to start, but didn't have the $10,000 commercial-grade mixers she needed. Meanwhile, her low-tech cash register kept customers waiting in line too long. "I had to really quickly turn this dream or vision of a cute little bakery into a mass production cupcake factory," Kandah told Business Insider. The key to this, she said, was securing the right loan at the right time — and not from a traditional bank.SEE ALSO: Successful founders match their funding to their revenue. Here are 12 options to consider, from early days to venture. MUST READ: How entrepreneurs use apps like Poshmark to turn side hustles selling clothes into full-time gigs earning 6 figures or more How the cupcakes went Colossal
Kandah opened her bakery in March 2012 with $6,000 in personal savings and in hindsight, she said, that was a mistake. She needed a lot more cash to grow, but didn't have the credit history to get a traditional bank loan. "As you're putting money back into your business, it was just hard to really get ahead," she said. When she swapped her register for a Square system, she learned that she could get loans to fund her expansion through Square Capital. Four years after opening, she used her first loan of $6,000 towards a soft-serve ice cream machine to more efficiently make her popular "cake shakes," which blend a cupcake into a milkshake. She instantly saw an uptick in customers and sales. "My sales went up so much from those shakes, people not having a wait time anymore, being able to just pump ice cream out and make these things," she said. Kandah paid off the loan within six months, which was sooner than the estimated 18 months Square had given her. In total, Kandah took out five loans through Square Capital and paid off each one within seven months or less. She liked that it was an automatic repayment, since Square takes a percent of daily sales until the loan is paid back in full, which she estimated was about 8% for her first loan. Colossal Cupcakes now has two locations, with a third opening in March 2020. The business has grown from $170,000 in sales in its first year to over half a million this year. "I was able to grow faster, sooner and not have to also personally struggle to be able to get those things in such a long amount of time," Kandah said. The power of the payment processor loan — and how to use it
PayPal, Square, Shopify, and Stripe service payments for millions of small businesses every day, so they're within close proximity to business owners' pain points. At the top of that list is getting the capital to scale and expand. These payment processors give their clients loans based primarily on sales. Since credit history isn't factored as heavily, if at all, it's often easier to get accepted for these loans compared to traditional bank loans. After the financial crisis of 2008, traditional banks slowed lending to small business owners, creating a gap in funding resources that payment processors were eager to fill. This new type of loan provides cash quickly and repayment is usually flexible. Since these loans are easier to access and have fewer requirements, they can be a good resource for mid-stage businesses that have at least $3,000 in monthly sales. At this point, a business has a steady sales volume, but needs more funding to hit its next milestone. For small business owners who already use these payment processors, getting loans through Square, Shopify, PayPal, or Stripe can be a simple process. Here's what you need to know about these loans and how to apply for one. How to work with Square Capital, which offers repayment based on sales
If you use Square as your payment processor, either for retail or e-commerce, the company offers funding through Square Capital, which it first launched in 2014 as a cash advance program. Loans range from $500 to $250,000 and can be deposited in as little as one business day. Business owners can see if they're eligible for a loan directly on their Square dashboard. Eligibility is primarily based on number of sales coming through the platform, not credit score. In general, the more sales your business makes, the more money you'll be approved to loan. Repayment is flexible and based on daily sales. On a slower week, you'll pay back less, and on a busier week, you'll pay back more. How to work with PayPal, which offers 3 types of funding
PayPal began offering loans in 2013, after hearing from its sellers who had trouble securing traditional bank loans following the 2008 financial crisis. If Paypal is your payment processor, the company offers two different options: PayPal working capital and PayPal business loans. The main differences between the two are repayment terms. PayPal working capital takes a percent of daily sales, ranging from 5% to 30%, selected by the business owner. PayPal business loans are automatically paid back at a weekly fixed amount. To be eligible for working capital, a business must be at least three months old and process at least $15,000 in annual PayPal sales. Similar to Square Capital, there's no credit check, since the application is based on payment processing history. To get a business loan through PayPal, a business needs to make at least $42,000 in annual revenue and the application does require a credit check. Additionally, businesses that do not use PayPal can apply for a PayPal service called LoanBuilder, which offers loans from $5,000 up to $500,000 and requires a credit check. How to work with Stripe, which partners with Funding Circle for bigger loans
Stripe is one of the latest companies to offer loans to its clients, launching Stripe Capital in September 2019. The company doesn't have a set range for its loans, but says they typically go from $5,000 to $20,000. Stripe Capital works similar to Square Capital — eligibility is determined solely on sales volume through the processor, not credit. Repayment is also based on daily sales, automatically deducting a percent of total sales until the loan is paid off. Stripe also partners with Funding Circle, a peer-to-peer lending company. Any small business owner can apply for a loan through Funding Circle, but Stripe expedites the application process for its clients by copying over their sales history. A minimum credit score of 620 is required. Loans for Stripe clients go up to $25,000, but Funding Circle independently offers loans from $25,000 to $500,000. How to work with Shopify Capital, which just launched smaller loans starting at $200
Shopify is an ecommerce platform and point-of-sale system for online retailers, servicing more than 1 million merchants globally. The platform has offered funding through Shopify Capital since 2016, and is now offering smaller loans starting at $200. If your business is already using Shopify for ecommerce, you can apply for loans and cash advances up to $1 million. Cash advances are available for businesses in all US states, while loans are limited to businesses in select states. To qualify, a business must use Shopify Payments and connect its bank accounts to the platform. There's no credit check. Instead, Shopify processes applicants based on the type of business, orders processed, and time on the platform. Repayment is based on percentage of daily sales, so the more you sell through the platform, the sooner your loan will be paid off. According to Kaz Nejatian, vice president and general manager of Shopify Financial Solutions, the company has advanced more than $750 million in funding to date.