You receive $100,000 from Shopify Capital. After that, Shopify starts taking a percentage of your daily sales until the agreed amount has been collected. If you are looking at the bank activity, it would be easy to confuse some of this activity with sales and fees.
It isn’t.
Ecommerce financing does not always look like a traditional bank loan. Shopify Capital, Amazon financing and other sales-based financing arrangements can provide businesses with cash and then collect repayment through future sales. Your accounting needs to separate the financing activity from the normal activity of the business.
Start With the Money You Received
If a lender or funding company deposits $100,000 into your bank account, you did not just earn $100,000.
The deposit needs to be recorded based on the actual financing agreement. Depending on how the arrangement is structured, that may include a liability and financing costs.
This sounds obvious. The problem usually comes later when repayments start coming out of ecommerce settlements.
If your accounting is simply recording the net deposits from Shopify or another platform, the financing repayments can get mixed together with sales, fees, refunds and other activity.
The Repayment May Not Be Fixed
Traditional loans are usually easy to recognize. You borrow money and make a monthly payment.
Some ecommerce financing works differently. Repayment may be based on a percentage of sales. A strong sales day results in a larger payment. A slower day results in a smaller one.
That can be convenient for cash flow, but it makes the accounting more important.
Assume Shopify processes $50,000 of sales and withholds $5,000 toward your financing arrangement. Your sales did not suddenly drop to $45,000. Part of the money from those sales was used to satisfy the financing obligation.
We need to record both pieces correctly.
Financing Costs Need to Be Identified
The amount you repay may also be greater than the amount you received.
Suppose you receive $100,000 and agree to repay $112,000. That extra $12,000 did not buy inventory and it is not a Shopify processing fee. It relates to the financing.
The agreement needs to be reviewed so the accounting reflects what actually happened.
This is another reason we do not want to simply record whatever hits the bank account.
The Cash Flow Can Be More Important Than the Accounting
The accounting for ecommerce financing is important, but I would also want to know why the business needs the money.
Maybe you are using it to purchase inventory that will generate a good margin. Perhaps sales are growing faster than your available cash. In those situations, financing may help support growth.
On the other hand, repeatedly borrowing against future sales to cover normal operating expenses can create a different problem. Every new sale is already being reduced by the repayment obligation.
That can make a business feel short on cash even when sales continue to grow.
Know What Is Coming Out of Your Settlements
Ecommerce settlements already contain a lot of moving pieces. You may have gross sales, refunds, marketplace fees, payment processing fees, reserves and chargebacks. Financing repayments add another one.
Your accounting should separate them.
If Shopify reports $100,000 of sales but only $72,000 reaches the bank, we should be able to explain the other $28,000. Some may be fees or refunds. Some may be reserves. And some may be repayment of financing.
The bank deposit alone does not tell us what happened.
Ecommerce financing can be useful. It can also be expensive. Either way, it should not disappear into your Shopify or Amazon deposits. You should know how much you borrowed, how much you still owe and what it is costing you.