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Arming the Rebels – Financing E-Commerce with Merchant Cash Advances (MCA)

Arming the rebels

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The Retail Apocalypse

I am old enough to remember when the Retail Apocalypse was being discussed in banking. Spoiler: It actually wasn’t that long ago. The bankruptcies for big box stores were pilling up. One of the biggest and most memorable to me was when SEARS applied for creditor protection. This moment stood out because SEARS’s downfall was defined by its inability to recognize this shift and pivot early to e-commerce. (1,2)

The craziest thing about the SEARS situation was that they had basically invented e-commerce before it even existed, they just didn’t realize it! The SEARS catalogue was a game-changer in the history of retail. They had catalogued and indexed all of their inventory, presented the catalogue directly to their buyers, the buyers selected items and could order them by mail. Sound familiar? Put the catalogue online and have the ordering processed by email and you have the future of retail: e-commerce.

It was right there, the execution just wasn’t.

Arming the Rebels

The tools to execute in e-commerce are here and they are easier than ever to set up and use. This is true for small retailers and big-box stores.

One of the most epic quotes from a tech community of the last decade had to be from Tobi, the founder of Shopify, when he was asked if he was competing with Amazon. I’ll never forget this answer:

Amazon is building an empire, and Shopify is trying to arm the rebels.

Tobi Lütke, Shopify Founder and CEO

Since then, Shopify ($SHOP) has become the most valuable company on the TSX surpassing the Royal Bank of Canada ($RBC) for the top spot (5).

Grow your own TAM (Tangible Addressable Market)

Something I will always find amazing about Shopify is that they not only support existing businesses, they are actually actively growing and creating their market by how easy their platform is to use. What I mean by this is that I have met entrepreneurs that have started their e-commerce businesses because Shopify exists not just taking an existing business online with it. That is an exceptional impact. That’s not even including the number of tech companies that are creating apps and add-ons built to service the Shopify marketplace/platform.

I’m obviously a little bit biased because I love the Canadian success story too.

War Profiteering

Tech Blogger, Packy McCormick, has an interesting post where he disagrees that Shopify is actually arming the rebels. He compares it more to war-profiteering with the argument that when everyone is armed then no one is really benefiting, except those doing the arming.

I disagree with this assessment. The main issues brought up seem to be that Direct-to-Consumer (DTC) brands are all “armed” and therefore no one can actually win. I think the unfortunate part is that, first of all, the assessment of winning or losing seems to be based on whether a company can reach venture scale. This metric for winning is wrong and one that I will talk about frequently in this blog. I’m not a fan of the idea that companies should only be created or considered a success if they can reach venture scale or become unicorns.

Second, The article also states that marketing is the only differentiator left which I also disagree with since I think it’s actually on the product that companies can differentiate. Regardless, it is a brilliant and informative article on e-commerce and DTC brands and the challenges they face. I’d definitely recommend the read for anyone involved in e-commerce. (6)

The incredible e-commerce tools to create an online store through Shopify are well known, but one of the ways that Shopify has decided to “arm the rebels” is with financing and Merchant Cash Advances. This type of financing is also offered by Clearbanc and Stripe (3).

Is E-commerce considered Tech Financing?

This is a debate I have been a part of many times. I see this answer as an easy yes. I understand the other side of the argument fully. It’s has a physical product. Instead of being sold in store, it’s just sold online. Yes, these things are true. But this is why it’s considered tech. The DTC Value Chain is often almost entirely managed by software.

This diagram from Packy McCormick Article is a great visual to show an example of how much of the DTC (e-commerce) value chain is managed with software and digitally. This is one of the main reasons why loans to DTC companies are considered technology financing.

This is the distribution chain that makes it a tech company from a financing perspective. There is substantial “tech risk” associated with e-commerce companies. An example of this risk is the question of whether or not the company will be able to deliver on its digital marketing and manage its digital supply chain.

Banks and eCommerce

Many banks will take a look at financing these companies and sometimes try to finance them. The main reason these discussions usually get shut down is because of the only asset in the business in inventory.

So when you look at the company from a traditional financing lens you end up with the following thought process: Revenues are growing: Check. Profitable: Check! Collateral: Consumer inventory… Oh. Then a bank starts to think, “okay, if this company with all their competitive advantages goes out of business selling this inventory, then how are we going to sell it in a liquidation scenario?”. Not to mention whether the company should even be carrying large amounts of inventory at all and is it even stored in this country? This starts to get too messy for them so we have to look at it from a tech finance perspective and that’s why MCA is so popular.

Creating a Negative Cash Conversion Cycle

The biggest cash flow problem that all DTC companies face is that they have to be able to convert their sales into cash faster than suppliers require repayment. If a company can do this, they have created a negative cash conversion cycle. This is a good thing. To understand this first let’s look at the Operating Cycle.

This is the Operating Cycle in it’s simplest form. Inventory becomes a Receivable which is turned to Cash to pay the bills (Payables) and to buy more inventory.

A negative cash conversion cycle means that it takes a company longer to pay suppliers/bills than it takes to both sell your inventory and collect the payments. In this situation, your suppliers are financing your operations so you don’t need substantial amounts of capital to grow.

This Cash Conversion Cycle diagram from Treasures.org shows an example of the Cash conversion cycle within the Operating Cycle. The time after the payment is made for the inventory (called “Raw Material” here) and until the payment is received in cash is the Cash Conversion Cycle.

The opposite of this is actually how most e-commerce companies operate, where payments to suppliers are required sooner than payments from customers can be collected, the result is cash flow issues. When this happens then as your sales increase, your cash flow actually decreases and you’ll need additional debt/equity to finance your growth. (I’ll dig into the specifics of these calculations and suggestions to improve the cycle in a future post).

In a traditional business like a manufacturing company, this could be solved with an operating line of credit margined against a company’s receivables. In a DTC company, a Line of credit is harder to get so MCA is one of the tools used to help finance this cycle.

Shopify and Clearbanc’s Merchant Cash Advances (MCA)

This might come as a surprise to some because of how friendly their advertising is these days, but historically Merchant Cash Advances were frowned upon as a source of financing. They were seen as very expensive loans that were distributed by Credit Card and Point of Sale (POS) companies and usually taken out in desperate situations to bridge short term cashflow issues. Earlier in my career when I would see these loans on a balance sheet it was often a red flag that the company was likely not going to be “bankable”.

Shopify Capital and Clearbanc have changed this perception. One reason I think this has happened is that financing for tech startups (yes- this includes e-commerce) is already generally happening at higher interest rates than traditional bank debt (5). Therefore coming in with an offering of a higher interest rate doesn’t actually raise any eyebrows.

Second, the ease of getting the loan is actually stunning. Clearbanc created the 20-minute Term Sheet and it’s probably even faster than that now. Every time I check in on Clearbanc or see an update, the max funding amounts have increased too which is also incredible. The pre-approvals and the data-based underwriting they use seems to be excellent.

I would love to have a look at this algorithm and I actually highly doubt that the default rates are substantially higher than most financial institutions on their loans. The model is probably that good. The returns from the loans will have to be higher but that’s mostly because they are funding their lending programs with equity funds so the returns need to exceed the cost of funds for profitability (8). Could they lower this cost of capital going forward? The easy answer is yes, with deposit accounts and treasury services (bank accounts and payment transfers). If they hold deposits they can make the spread in-house instead of off of equity investments. If they haven’t started to roll them out yet I would expect this is coming down the pipeline or at least being discussed.

Pros and Cons of MCA Loans


Let’s start with the positive.

  • Data based underwriting removes bias. Michelle Romanow often talks about the fact that they finance more minority-owned businesses and women-led businesses than venture capital. This is wonderful to see.
  • Simple process – Clearbanc has the 20-minute term sheet. Shopify’s process is very simple too and if they don’t have this feature already I would expect that there will be pre-approved loans pop up in the founder’s dashboards down the road.
  • No collateral required. This is music to a tech founder’s ears. Especially for earlier stage companies because there is likely none to offer.
  • No personal liability. Again music. Personal guarantees are a common form of security for bank debt. Keep in mind that loans without personal guarantees likely cost more than those with them, but to some, this is an important factor.
  • Fees instead of interest. The fees are pretty clear (other than the confusion around the annualized costs). They are upfront and they don’t fluctuate. The interest rate doesn’t compound either. Just beware of the time horizon, the annual cost of capital changes substantially if paid down early and a borrowing fee  interest rate.
  • The Lender gets paid first with MCA‘s and right off of the top line. The deposit occurs and then the repayment comes right out of the revenues being deposited into your accounts. The funds are usually withdrawn as soon as the revenue deposit hits your bank account. With other types of debt, you will create your revenue, run your company and then interest and principal will be one of your monthly expenses.
  • There is typically no way to prepay or payout a contract early with any benefit. Once the money is borrowed, no matter how long it takes to pay it back it is still going to cost the same. This is referred to as a fixed borrowing cost. This can actually be a benefit to the company from a budgeting perspective too since you know what your loan is going to cost exactly to repay and there is no risk of fluctuation from the federal interest rates while being on a floating rate.
  • Cost of Capital can be very high and easily get up into the 30%+ range (or higher) on an Annual Percentage Rate (APR) basis with short term repayments and fixed fees. Make sure that you are calculating the costs of capital on an annualized basis.
  • Controlled Spend. These funds often have to be used for specific marketing expenses or are highly incentivized to be used with specific companies (eg: Facebook Ads). I do actually see this as a good thing since this is one of the things that debt should typically be used for and the controlled spend can remove the temptation to allocate debt to things that loans shouldn’t be funding (hint: Non-Revenue generating activities).
  • The loans are very short term. Shopify’s are 12-month terms and Clearbanc offers similar. Not exactly patient capital, but can be used to bridge short term cash flow issues. Unfortunately, short-term financing can put substantial pressure on the near future’s cash flows and growth.

Examining the Costs of Fees vs. Interest Rate

Something that is often missed when comparing fees to interest is that an interest rate is an annual amount. Here’s a very simple example. If you are charged a 6% fixed fee on 4 advances (one per quarter) that you pay back every 3 months, then the cost of capital is actually 24%.

A simple formula for this is (the fee percentage paid/amount of days the loan was taken out for) then multiply this number by 365. That is your APR.


  • Consider the pros and cons of MCA for your specific situation from this post.
  • Make sure to understand the true Costs of Capital associated with any fees or interest rates.
  • Look into your cash conversion cycle to see if you can improve it. (I will have a post with recommendations posted soon)
  • Consider if this is the best financing option for the company or if term loans or equity may be a better option.
  • I am a huge fan of what both Shopify and Clearbanc are building and will always be cheering for them as Canadian success stories. They are two of the top Canadian tech companies to follow and I expect more financial products to keep coming from both companies. (8)


(1) Story on the Retail Apocalypse from Business Insider

(2) In finance I like making statements like this “old enough to remember” because it makes me sound like a seasoned veteran but the SEARS situation was actually in 2018

(3) Here is Shopify’s Loan details and here is Clearbanc’s Loan details.

(4) This article looks at how Sears actually didn’t succeed in their e-commerce pivot also an interesting perspective that the hedge fund that bought SEARS may have seen it as more of a real estate play.

(5) Top spot on the TSX (Toronto Stock Exchange) doesn’t guarantee you stay there. $RIM (Research in Motion/Blackberry held this spot for a while). Still, I am willing to bet on Spotify long term since their TAM is huge and they have just barely scratched the surface of it.

(6) Article by Packy McCormick on Shopify

(7) Clearbanc has also expanded in SaaS Based Recurring Revenue Financing but I will talk about that in another post.

(8) Clearbanc recently raised 300 million in equity to continue to grow their market share

External Ressources

– Jay Vasantharajah has a great post where he dissects the specific costs associated with a loan from Clearbanc.

– Patrick Coudou Tweeted a thread about his experience and opinions on MCA.

– Here is another resource on the details of the loans and specific requirement to qualifying for MCA from Finder.com.

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