Home England Income Tax Shopify, Square among companies hoping to ease e-commerce slowdown by lending money to merchants

Shopify, Square among companies hoping to ease e-commerce slowdown by lending money to merchants


Désirée Kretschmar, owner of the Plant Goals store in Peterborough, Ontario, took part in a beta test of the Square Loans program to buy new inventory in the fall.Ash Nayler/The Globe and Mail

E-commerce companies facing a sudden slowdown are hoping one of their newer lines of business can help bridge the gap: lending money.

Technology companies that provide online sales and transaction services to retailers and small businesses are also increasingly offering these customers loans and cash advances to keep them loyal to their service platforms.

They do so for a fee and a share of future sales, providing small businesses with a ready source of cash in a pinch, with such loans now worth billions of dollars.

It’s often a mutually beneficial arrangement, but like any lending program, it comes with risks — especially when the recent slump in e-commerce spending turns into an extended slump.

E-commerce companies like Shopify Inc. SHOP-T, Amazon.com Inc. AMZN-Q and several others recently released lower-than-expected financial results, sending their share prices plummeting amid signs of rapid online traffic growth Pandemic is no longer sustainable. Rising inflation also raises concerns that consumers are reining in their discretionary spending.

Shopify, for example, announced in its earnings report last week that it had written off $46 million in bad debt last quarter alone, with nearly half a billion dollars still outstanding in advances.

Block Inc. SQ-N, the owner of Square Inc., is the latest company to offer credit to Canadian merchants with the launch of Square Loans last month. It follows similar programs launched by competitors Shopify and Lightspeed Commerce LSPD-T during the pandemic.

Square Banking general manager Luke Voiles says offering credit can be a way of guiding merchants through a difficult time.

“If they’re going through a tough time, and we can keep them in business over time, we can help them survive,” he said. “It feels really good.”

“We try to resolve pain points as best we can to make sure they stay with us.”

Dan Romanoff, a Chicago-based senior analyst for e-commerce and software companies at Morningstar Inc., says offering credit to such companies is becoming increasingly necessary — a tempting incentive for merchants to continue working with e-commerce platforms .

“It’s something that once you start using this software and then start making capital, it’s very hard to stop,” said Mr. Romanoff. “The ability of Shopify or any of their competitors, in all honesty, to offer any sort of capital support is just that they’re more of a one-stop shop.”

The programs offer a certain amount of cash in exchange for an upfront payment. The money is returned by deducting a small amount from the trader’s daily turnover.

In an example provided by Square, a merchant wanting to borrow $10,000 could be charged a fee of $1,300, so a total of $11,300 would be deducted in installments from their sales over 18 months. Square estimates most fees would amount to around 10 to 13 percent of the loan. A cash advance on a credit card would have a higher interest rate, while most bank loans would have lower interest rates.

Both Square and Shopify use algorithms to set the terms of their loans, while Lightspeed says the terms are set through a mix of algorithm and human analysis.

In all cases, however, the loan offers are based on the dealer’s sales documents and, unlike a classic bank loan, do not include a credit check.

Shopify says its automated process allows merchants to avoid filling out lengthy loan applications or writing business plans.

Désirée Kretschmar, the owner of the Plant Goals store in Peterborough, Ontario, took part in a beta test of the Square Loans program to buy new inventory in the fall. She said she found the experience much easier and quicker than applying for a loan from a bank.

“It took about as long as it takes to drink a cup of coffee,” she said.

But not running a credit check adds an element of risk.

David Lewis, a bankruptcy trustee at BDO Canada, said the decision not to conduct credit checks means e-commerce platforms have no idea if merchants have other loans that they may have difficulty repaying. It could also provide a way for struggling companies to delve deeper.

“With no credit check or no collateral, I could just see someone go out and apply for these small loans to help meet their short-term needs,” said Mr. Lewis. “A bit like what people do with payday loans.”

However, he added that e-commerce companies have the benefit of being able to take money directly from a merchant’s earnings, a power most creditors don’t have.

The amount of money provided through these lending programs varies greatly depending on the platform.

Shopify says it has provided more than $3 billion to merchants in the United States, United Kingdom, and Canada through Shopify Capital since 2016. The company’s results, released Thursday, said it advanced $347 million in cash and loans in the first quarter of 2022, up 12 percent from the first quarter last year. The company’s most recent quarterly corporate filings indicate that it had $487 million in outstanding loans to dealers as of March 31, after writing off $46 million in bad loans and advances.

Square says it has provided $9 billion in loans in the United States, Australia and Canada. The company did not say how much was paid back. Company filings for fiscal 2021 show it took retailers an average of nine months to repay the loans.

However, Lightspeed Capital hasn’t been used nearly as much. Company records show that as of December 31, 2021, the program had $5.3 million in outstanding debt. An analysis by Credit Suisse researchers last month found fewer than 300 traders would use the program by fiscal 2024.

Still, Mr. Romanoff said he expects other companies to expand their lending offerings. He pointed to Amazon’s efforts to give advances to third-party sellers on the Amazon Marketplace.

“This is something that’s real, and it benefits users,” said Mr. Romanoff. “I think it’s valuable and I don’t think it’s a money loser.”

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