E-commerce companies, facing a sudden slowdown, are hoping one of their newer business lines can help pick up the slack: lending money.
Tech companies that provide online sales and transaction services to retailers and small businesses are also increasingly offering loans and cash advances to those customers in a bid to keep them tied to their service platforms.
They do so for a fee and a share of future sales, providing a ready source of cash for small businesses in a pinch, with such loans now worth billions of dollars.
It’s often a mutually beneficial arrangement, but like any credit program, it comes with risks – especially if the recent pullback in e-commerce spending turns into a prolonged slump.
E-commerce companies such as Shopify Inc. SHOP-T, Amazon.com Inc. AMZN-Q and several others have recently posted lower-than-expected financial results, sending their stock prices plunging amid signs that the rapid growth in online traffic during the pandemic is no longer sustainable. Surging inflation is also raising concerns that consumers are cutting back on discretionary spending.
Shopify, for example, revealed in its earnings report last week that it had written off US$46-million in bad credit in the last quarter alone, with almost half a billion dollars of advances still outstanding.
Block Inc. SQ-N, the owner of Square Inc., is the latest to offer credit to Canadian merchants with the launch of Square Loans last month. It follows similar programs launched during the pandemic by competitors Shopify and Lightspeed Commerce LSPD-T.
Luke Voiles, the general manager of Square Banking, says offering loans can be a way of seeing merchants through a difficult time.
“If they go through a rough spot, and we’re able to keep them in business over time, we’re able to help them survive,” he said. “It feels really good.”
“We’re trying to solve pain points as much as we can to make sure that they stay with us.”
Dan Romanoff, a Chicago-based senior analyst of e-commerce and software companies at Morningstar Inc., says offering credit is becoming increasingly necessary for such firms – an enticing incentive for merchants to continue working with e-commerce platforms.
“It’s something where, once you start using this software and then gain capital, it’s very hard to stop,” Mr. Romanoff said. “The ability of Shopify or any of its peers, quite honestly, to offer some sort of capital assistance is just them being more of a one-stop shop.”
The programs provide a certain amount of cash in exchange for an upfront fee. The money is paid back by deducting a small amount of the merchant’s daily sales.
In an example provided by Square, a merchant who wants to borrow $10,000 might be charged a $1,300 fee, so a total of $11,300 would be deducted in installments from their sales over 18 months. Square estimates most fees would work out to about 10 per cent to 13 per cent of the loan. A cash advance on a credit card would carry a higher interest rate, while most bank loans would have lower rates.
Both Square and Shopify use algorithms to set the terms of their loans, whereas Lightspeed says its terms are decided by a mix of algorithm and human analysis.
In all cases, however, the credit offers are based on the merchant’s sales records and, unlike a traditional bank loan, do not involve 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, Ont., participated in a beta test of the Square Loans program in the fall to buy new inventory. She said she found the experience much easier and faster than applying for a loan at a bank.
“It took about as long as it takes to drink a cup of coffee,” she said.
But not performing a credit check adds an element of risk.
David Lewis, an insolvency trustee with BDO Canada, said opting not to perform credit checks means the e-commerce platforms have no idea whether merchants have other loans they may be struggling to pay off. It could also provide an avenue for struggling businesses to get deeper into debt.
“Without any credit check or without any security being put up, I could just see someone going out and applying for these small loans to help cover what they need short-term,” Mr. Lewis said. “Sort of like what people do with payday loans.”
He added, however, that e-commerce firms have an advantage in being able to deduct money directly from a merchant’s revenue, a power most creditors don’t have.
The amount of money being delivered through these credit programs varies widely by platform.
Shopify says it has provided more than US$3-billion to merchants in the United States, Britain and Canada through Shopify Capital since 2016. In the company’s earnings released Thursday, it said it had advanced US$347-million in cash and loans in the first quarter of 2022, up 12 per cent over the first quarter of last year. The company’s latest quarterly corporate filings indicate it had US$487-million in outstanding credit to merchants as of March 31 after writing off US$46-million in uncollectible loans and advances.
Square says it has provided US$9-billion in loans in the U.S., Australia and Canada. The company did not say how much had been paid back. Corporate filings for the 2021 fiscal year show that, on average, merchants took nine months to pay back the loans.
Lightspeed Capital, however, has not been used nearly as often. Corporate filings show the program had $5.3-million in outstanding loans as of Dec. 31, 2021. An analysis by Credit Suisse researchers last month estimated that fewer than 300 merchants would make use of the program by the 2024 fiscal year.
Still, Mr. Romanoff said he expects other companies to expand their credit offerings. He pointed to Amazon’s efforts to provide advances to third-party sellers on Amazon Marketplace.
“This is something that is real, and it does benefit the users,” Mr. Romanoff said. “I think it’s valuable and I don’t think it’s a money loser by any means.”
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