Comment by notpeter | Hacker News Reader

Comment by notpeter | Hacker News Reader

> "Merchant cash advances do not have an interest rate. Instead, Shopify will purchase a set amount of your future receivables at a discount."

Their page never specifies a "discount" rate and only show the 10% remittance rate. This makes their example table at the bottom near fraudulent because the "daily revenue" column is already discounted. I'd bet their discount rate is the same ~13% it was six months ago [src].

They know your revenue history, so I expect they're offering something which will likely take you 9-12months to pay back at the remittance rate (10%) based on your projected revenue. Note since this isn't a loan, if you pay it back early by growing revenue, Shopify still makes the same returns (13% discount rate) on their capital. Good deal for them, likely comparable to credit card rates for businesses, but since it's cash it's more flexible (pay employees, payoff loans, brides, etc).

[src]: https://twitter.com/seobrock/status/669269206584553473

How is this functionally different from a loan? It appears to be identical.

Instant approval with no docs but much worse hidden rates

According to the marketing you must have an existing relationship with Shopify and be pre-selected by Shopify to "access" a pre-approved amount.

You make a good point point but it was hard to understand the way you phrased it: I think you mean that listing a discount rate (or any kind of pricing) wouldn't make sense because it is customer specific (history/existing relationship) and will vary accordingly?

I mean to say that the approval isn't really instant, as Shopify has already examined your cash flow and made a specific determination to market the offer to you.

The claim that no docs are required is also specious, as, again, Shopify already knows your personal information and real-time cash flow.

I would assume that the pricing is customer specific, which would make it more difficult to publicly advertise a price.

There's no interest that grows over time. You pay back the same amount.

Shopify is betting that they can predict when you'll pay it back, then set a discount that makes them more money than time-based interest. If they lose, they still get their money back eventually, and if they win, hey, that means you grew faster than expected, which is great for everybody.

I don't believe there is a requirement that interest on loans be compounded or time-sensitive.

I think you are correct, it is just that it is actually required that you do charge interest.

However, I worked with a woman who was Jewish. She showed up in a new car one day and we went for a ride.

I asked her how and when she went and got the car.

She said "oh I got a loan from the Jewish community" or something to that effect.

I inquired what that meant; she said that she was able to get a loan from some Jewish social circle and she didn't have to pay interest because she needed someone else from the Jewish circle who was willing to back her and pay the loan of she failed to pay.

I didn't ask what the consequences were if she failed to pay - but she just mentioned that "if you know Jewish people... Getting money isn't hard"

Unrelated parties are not required to charge interest on loans. (However, interest generally will be imputed on loans between related persons.)

> Unrelated parties are not required to charge interest on loans. (However, interest generally will be imputed on loans between related persons.)

You're never required to charge interest, but in most situations if you receive a below-market loan (from anyone other than a spouse) over $10,000 the IRS will impute interest.

Interesting, I was loaned enough money to buy a house from a family member, and I was required to pay them back with market interest... Thus my comment was from experience - even though I may be wrong?

Merchant cash advances are technically not loans because you're selling future receivables. The advantage is that these transactions are not regulated like loans and importantly, are exempt from usury laws. That's why annual effective interest rates on MCAs can exceed 100%

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