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It may have started with the likes of PayPal Holdings Inc. and Square Inc., but it isn’t stopping there. Having made their mark in merchant processing, high-tech payments firms are increasingly turning their attention to the business of offering funding to the merchants they serve.
The move is bringing them into competition not only with PayPal and Square, which introduced PayPal Working Capital and Square Capital, respectively, late in 2013 and early in 2014, but with independent sales organizations and other merchant-service providers that have long dominated the business of merchant cash advances.
The latest entrant is Shopify Inc., an Ottawa-based e-commerce platform and merchant processor, which unveiled Shopify Capital on Wednesday after a trial run. The service will be open initially only to select merchants in the United States, but Shopify expects to make it more widely available later in the year.
As with competing services, Shopify Capital makes cash advances to “eligible” merchants in its portfolio and collects payments from the processing volume those merchants ring up on the Shopify platform. Shopify continues to withhold a fixed percentage of the volume until the advance is fully paid, with a premium. Merchants can use the advances for equipment purchases, facility expansion, or any other business purpose.
Shopify, which was founded in 2004 and went public nearly a year ago, serves online and physical merchants of all sizes in some 150 countries, though many of its 243,000 clients fall into the small and mid-size category.
“For many merchants, securing capital is a frustrating and time-consuming process,” said Saad Atieque, product manager at Shopify, in a statement. “With Shopify Capital, we’re giving entrepreneurs a simple, fast, and convenient way to secure financing to invest in their business.”
That “frustrating” process is also luring platform businesses that see an opportunity for technology to smooth funding for small merchants. One example is BlueVine Capital Inc., which on Wednesday announced it has received what it calls a “strategic investment” from Citi Ventures, the venture arm of Citigroup Inc. Terms were not announced.
BlueVine specializes in invoice factoring, which allows businesses to receive funding by selling unpaid invoices from seven to 90 days old to the Palo Alto, Calif.-based company at a discount ranging from 10% to 15%. Founded in July 2013, the company claims to be the first to develop a fully online, cloud-based platform for invoice factoring and says it is “on track” to fund more than $200 million this year.
With the entry of new players, the business of alternative small-business lending—financing from entities other than banks and finance companies—is growing quickly. The market totaled $4.4 billion in advances in 2013, a figure that was expected to reach $6.17 billion by the end of 2015, according to estimates from The Strawhecker Group, an Omaha, Neb.-based research firm.
