Shopify Expands into SMB Lending

eCommerce software provider Shopify has announced that it’s expanding into SMB lending. Operating under the existing Shopify Capital division, it will offer starter loans to U.S. entrepreneurs. This is meant to have the dual benefit of lender-based revenue, as well as seeding its own target customer base.

The Shopify Capital division was launched in 2016, mostly for the latter reason. But up until now, it only offered cash advances. The addition of starter loans means that eligible Shopify Payments merchants can apply for initial loans of up to $1 million to gear up their business and cultivate eCommerce needs.

Loans will be available to merchants in 14 US states. They can apply by authenticating and linking their bank accounts to Shopify. Loan amounts will then be deposited directly into borrowers’ bank accounts. Repayment schedules happen as a function of fixed percentages of the borrower’s Shopify store sales.

As stated, Shopify’s goals here involve seeding the success and growth of its core customer base. The thought is that helping them grow will correspondingly boost Shopify’s revenue as an eCommerce enabler. If it can position its merchants to operate on a larger scale, its platform demand grows proportionately.

Indeed, a tweet from Shopify financial solutions VP and GM Kaz Nejatian expressly states the company’s intent.  He specifies the company’s past observations that early-stage SMB loans can have an outsized impact on operational trajectory. The underlying message to SMBs is ‘let’s grow together’ (our words).

Adjacent and Complimentary

There are likely additional benefits such as greater retention among these merchants. We don’t have the exact terms of service and it’s unlikely that Shopify is locking these borrowers into using its eCommerce platform. But there is a certain amount of goodwill and loyalty that likely flows from the lending role.

Notably, this follows Shopify’s recent expansion into email marketing. As we examined, expanding into adjacent and complimentary services allows Shopify economies of scale and broader appeal that’s pursuant to customer retention and recurring revenue. The latter is getting lots of attention lately, a la ARR.

As we wrote at the time:

Back to the theme of feature expansion, this logical integration aligns with a macro trend we continue to track: the rapid expansion of SMB SaaS bundles. Among other market events, this follows Constant Contact’s move into websites (sort of the reverse of Shopify’s move), and GoDaddy’s new marketing suite.

The thought is that a larger bundle boosts revenue per user, retention and thus lifetime value. The latter is all about having more tentacles that reach into business operations, thus anchoring a given vendor in SMB operational support. That in turn creates a sort of lock-in effect and greater SMB switching cost.

Beyond yield optimization, an expanding bundle is compelled by naturally dovetailing products. For example, Shopify’s ability to tap into the eCommerce back end lets it automatically segment email lists and messaging as outlined above — something that other email marketing tools can’t do as natively.

…Expect more bundling and feature expansion from Shopify and others that target SMBs.

The expansion into lending can be seen in a similar light, and we don’t believe it will stop there. For all of the above reasons, expect more functional rollouts that compliment the core eCommerce platform. If we’re to speculate, that could involve other presence and promotion functions such as search marketing.

Cumulatively over the past three years, Shopify Capital reports that it has sent more than $750 million in funding through cash advances. That pace will likely accelerate now that it’s adding SMB loans to the mix. We’ll keep tracking Shopify’s activity to see how all of the above dynamics play out.

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