The world of e-commerce funding can be overwhelming for small business owners. With countless options to consider, it’s important to understand the unique funding opportunities that come directly from the platforms you already use. In this first installment of the “E-Commerce Funding for Dummies” series, we’ll explore what are known as “captive” or embedded e-commerce funding options.
These financing programs are offered by marketplaces such as Shopify, Amazon, Walmart, and eBay, making them an attractive and convenient choice for many sellers. Perhaps the best part is that if you’re an e-commerce business, yoBut before diving in, let’s break down what these options entail and whether they might be the right fit for your business.
What Are Captive E-Commerce Funding Companies?
Captive funding, also known as embedded lending, refers to financing options provided directly by the marketplace or platform where you sell your products. These programs leverage the platform’s access to your sales data to pre-qualify you for funding, offering an easy and streamlined application process. Key players include Shopify Capital, Amazon Lending, Walmart Marketplace Capital, and eBay Seller Capital.
Key Benefits of Captive E-Commerce Funding
- Convenience: Embedded directly into platforms you already use, eliminating separate applications.
- Pre-Qualification: Funding offers are based on your sales history and performance metrics.
- Aligned Repayments: Repayments adjust with sales, reducing financial strain during slower periods.
- Quick Access to Capital: Funds are often available within days of acceptance.
The Cost of Capital
Most lenders don’t publicly share cost details, but based on years of industry experience, these products are usually priced using a rate factor or fixed borrowing cost.. This means your repayment is calculated by multiplying the funding amount by a rate factor. For example, $100,000 at a 1.10 rate factor would result in $110,000 total repayment. Alternatively, you might see a 1.10 quoted as a 10% fee for borrowing or with similar phrasing.
Rate factors from these funders typically range from 1.05 to 1.15, depending on:
- Business Strength: Factors like revenue, time in business, and reviews.
- Repayment Period: Faster repayments generally result in lower rate factors, while slower repayments (with lower daily deductions) increase costs.
This pricing approach applies broadly to working capital loans and merchant cash advances.
How Much Will I Qualify For?
Specific qualification ranges aren’t advertised, but in my experience, most businesses qualify for 75% to 140% of their average monthly sales. Factors influencing this include:
- Sales Stability and Growth: Consistent revenue increases qualification likelihood.
- Seller Reviews: Strong reviews boost confidence in repayment ability.
- Product Categories: Less risky categories often secure higher offers.
Establishing a repayment history can also unlock larger funding amounts over time.
The Drawbacks of Captive Funding
While convenient, there are significant downsides:
- Limited Scope: Captive funding addresses platform-specific revenue only. Sellers operating across platforms or channels may find this restrictive. For example, if you sell through your own Shopify site but also on Amazon, Shopify Capital will only underwrite your Shopify sales. Or say you’re an emerging CPG brand selling direct-to-consumer online but also wholesaling to big box retailers–only your direct-to-consumer sales are likely to be considered.
- Higher Costs: Rate factors cannot be directly compared to the APR offered by a bank (i.e. a 1.10 rate factor and a 10% APR are NOT the same thing). But I’ll save you the suspense, all of these options are going to be much more expensive than a bank. And they should be, they’re taking much larger risks and moving a lot more quickly.
- Lack of Flexibility: Terms are pre-set by the platform, leaving little room for negotiation.
Personal Considerations
It’s unlikely you’ll proactively apply for these programs. Your sales data is continuously evaluated, and lenders will select you when they deem you eligible.
Additionally, while personal guarantees or credit checks are often unnecessary, this is because lenders have significant control over your platform. They can withhold payouts or limit your selling if you default.
Borrowers must also be wary of overleveraging. These are huge companies moving quickly and looking at limited data. They aren’t turning every rock of your business when you’re being underwritten. So if you already have funding in place, keep in mind that they don’t know about it but it’s still your responsibility to make sure you aren’t taking out unmanageable debt.
Conclusion: What’s Next?
Captive e-commerce funding is an accessible tool for addressing immediate business needs, but it’s not a one-size-fits-all solution. In Part 2 of this series, we’ll dive into broader funding options beyond embedded lending, exploring how e-commerce businesses can secure financial support that aligns with their growth goals across multiple platforms and revenue streams.