Like any other industry, the business financing industry must constantly adapt to suit the needs of a changing market. Well, how has the small business world changed as of late? Which industries are growing at the fastest pace? Two examples that come to mind are Ecommerce and SaaS, which stands for “software as a service.” Some of the most popular SaaS companies include Slack, Mailchimp, Square, and Salesforce. The demand for these services will likely increase dramatically in the near future.
And the business financing industry has clearly taken notice. More and more companies are creating products that specifically benefit Ecommerce and SaaS companies. In 2019, Stripe launched Stripe Capital in an attempt to become the go-to working capital resource for Ecommerce companies; many of which already use Stripe as their payment processor. Earlier this year, Brex released the Brex Corporate Card, which awards new users with discounts and credits towards a myriad of SaaS companies, like Zendesk and Expensify.
However, few business financing companies can say they are better suited for Ecommerce and SaaS startups than Clearbanc. Founded in 2015, this Toronto-based startup has financed over 1,000 companies, including mattress manufacturer Leesa Sleep, fashion-rental service Le Tote, and home goods supplier Public Goods.
Clearbanc’s growth can certainly be attributed to its unique requirements and repayment structure. Both aspects were exclusively designed for the unique financial circumstances of Ecommerce and SaaS startups.
In this guide, we’ll explain how Clearbanc’s product works, the primary requirements for eligibility, and what ultimately makes this product so different from its many competitors.
What is Clearbanc?
Clearbanc’s product is extremely similar (if not almost identical) to a merchant cash advance. The repayment structure for a merchant cash advance is very different than a traditional business loan.
Like a business loan, the borrower is given a lump sum. But instead of making monthly payments, the debt is paid back via a fixed percentage of future debit and credit card transactions. So, you only make a payment when you make a sale. When you have a slow month, you pay less. With a traditional business loan, you’d have to pay the same amount every month, regardless of how many sales you made.
Since there is no fixed monthly payment, there is no set due date on the total amount. You just keep making sales until the total amount is paid off, regardless of how long that takes.
Clearbanc customers can borrow a minimum of $10,000 to a maximum of $10 million.
Clearbanc: Interest and Fees
Though many companies offer merchant cash advances, each company has a slightly different system for making money on these products. With Clearbanc, each loan has two percentages. First is the fixed percentage of future debit and credit card sales from the previous section. The second percentage is also fixed, but it works more like a flat fee.
Let’s say you take out a loan for $20,000 with a flat fee of 6%. This brings your total amount, or principal, to $21,200. Then, you have your other percentage of future debit and credit card sales. Clearbanc would deduct this percentage from your sales until that $21,200 is paid off.
Later on, we’ll specify what Clearbanc customers can expect from each percentage. But first, let’s go over the requirements for eligibility, since this directly impacts how much you’ll pay.
Clearbanc: Requirements for Eligibility
Earlier, we noted that Clearbanc’s products are exclusively designed for Ecommerce and SaaS companies. That’s because if you don’t belong to either of these two industries, you cannot qualify for Clearbanc loans! Clearbanc is perhaps the only business financing company with such a strict limitation on clientele. But this just shows how confident Clearbanc is in the rise of Ecommerce and SaaS. All other industries need not apply.
Another considerably restrictive requirement is Clearbanc’s average monthly revenue: at least $10,000. That’s pretty high compared to the rest of the business financing industry. Plenty of companies work with borrowers that earn as little $50,000 per year. But once again, this requirement merely reflects Clearbanc’s projections for Ecommerce and SaaS companies. You can’t blame them. In the near future, $10,000 could very well be the standard for monthly revenue in both industries.
Since Ecommerce and SaaS companies tend to grow very quickly, it’s no surprise that Clearbanc only works with limited liability companies (LLCs) or corporations. Regardless of their industry, any company that plans on applying for business financing is recommended to become a registered entity. Sole proprietors typically have a harder time obtaining financing because they are not required to have business bank accounts. Thus, they cannot produce bank statements to show potential partners how much their businesses are earning and spending.
Also, Clearbanc does not require collateral or a personal guarantee. This means that if the business defaults on the loan, Clearbanc cannot seize the business owner’s personal assets to make up for the lost funds.
Clearbanc: Time in Business and Credit Score
Clearbanc’s requirements for time in business and credit score align with the current direction of the business financing industry. In the past, it was nearly impossible for young businesses to be approved for business loans. Most companies required at least 1-2 years in business. Nowadays, businesses that are just six months old have a myriad of financing options, and that includes Clearbanc.
However, Clearbanc points out that it doesn’t just require six months in business. Eligible businesses must have six months of consistent revenue as well. Though Clearbanc’s criteria for “consistent” isn’t clear, it’s probably safe to assume that businesses that experience occasional dips in revenue won’t qualify. These cash flow issues are very common in seasonal businesses. But Ecommerce businesses sell to customers all over the world, and SaaS companies are typically subscription-based. In other words, neither industry has to worry about losing customers during certain times of the year.
Lastly, Clearbanc has no minimum requirement for personal credit score. Flawless personal credit used to be the number one requirement for business loans. This policy, however, may be completely phased out of the business financing industry within the next decade or so. If companies want to make business loans more accessible to younger businesses, they cannot expect the business owner to have extensive credit history. New entrepreneurs also tend to finance startup costs with personal credit cards, which can cause their credit scores to plummet.
Clearbanc: How Use of Funds Effects Fees
Like most companies that offer merchant cash advances, the percentage of each sale that Clearbanc takes is based on cash flow. Businesses with exceptional cash flow can pay as little as 1% of each sale, while businesses with rockier cash flow can pay up to 20%.
Clearbanc’s second percentage, on the other hand, is based on entirely different criteria. In order to explain this unique policy, we must understand why it was created in the first place.
Clearbanc was originally formed to be an alternative to venture capital. Up until fairly recently, this was the most accessible source of funding for tech startups. According to the founders of Clearbanc, many startups end up using the majority of their venture capital to pay for digital advertising. This leaves the startup with very little money to cover other vital expenses, like labor and equipment. And since venture capital is a form of equity financing, the business owner also loses a portion of ownership. As a result, the business owner has less personal funds to re-invest back into the business.
Clearbanc is striving to eliminate this problem by giving startups another way to pay for digital advertising. If you visit Clearbanc’s website, you will see a list of popular marketing channels like Facebook, Google, Amazon, and Twitter. Companies that use Clearbanc funds to buy ads from this vendor list will automatically be given a flat fee of 6%. Companies that use the funds for other purposes will have to pay up to 12.5%.
To clarify, this is the fee that determines your principal. A fee of 12.5% on a $20,000 loan would give you a principal of $22,500.
In order to apply for a Clearbanc loan, you must create an account on their website. This requires basic information about your business and yourself (the business owner). Then, you must connect Clearbanc to the online accounts you use to make sales and payments (PayPal, Square, Stripe, etc.). Remember, Clearbanc is used entirely by Ecommerce and SaaS companies, all of which use online accounts to make sales and payments. Next, connect Clearbanc with the online accounts you use for digital marketing (Facebook, Google, Amazon, etc.).
It reportedly takes about 20 minutes to enter all of this data.
Once you’ve created an account, a representative from Clearbanc’s investment team should contact you within 1-2 business days. Even though you haven’t completed the full application yet, you will be able to review loan offers when you log back in to your account. The last step is uploading the following three documents: your article of incorporation, government-issued ID, and your employer identification number.
Since you’ve already technically been approved, the money should appear in your bank account within 24 hours.
Clearbanc: Which Businesses is it Designed For?
As you can see, Clearbanc’s products are geared towards a highly specific type of customer. Eligible businesses must belong to the Ecommerce or SaaS industries and earn an average of $10,000 in monthly revenue. A young business that is earning that kind of monthly revenue is probably growing very quickly and therefore has plenty of working capital to spare.
When you consider Clearbanc’s target clientele, the repayment structure of a merchant cash advance doesn’t seem like an issue, either. Compared to other forms of financing, a merchant cash advance is one of the more expensive options. Even with a relatively low percentage of daily sales, many businesses cannot afford to put that kind of pressure on their cash flow. The fixed monthly payment of a traditional business term loan is usually cheaper than the monthly cost of a merchant cash advance.
For this reason, merchant cash advances are only recommended for businesses that perform a high volume of debit and credit card sales. Of course, thriving Ecommerce and SaaS companies don’t have to worry about that because that’s the only type of sales they perform.
But in the case of Clearbanc, customers must not only perform a high volume of sales but also maintain that volume month-to-month. SaaS companies will likely have less trouble meeting this requirement because their revenue comes from monthly subscriptions. Once they acquire a solid customer base, they can expect the same amount of revenue to flow in every month moving forward. Ecommerce companies, on the other hand, are much more vulnerable to fluctuations in revenue due to external circumstances like major events or changes in the global economy.
Clearbanc: Pros and Cons
At this point, we’ve established that Clearbanc is only a sensible option for thriving Ecommerce and SaaS companies. So, in order to determine if Clearbanc is the right choice for your business, we must compare it to other popular options for their target clientele.
However, when you consider the kind of cash flow and monthly revenue required for Clearbanc loans, it’s safe to say these businesses have a myriad of advantageous options to choose from. After all, the cheapest business loans on the market have always gone to the most successful and heavily-capitalized businesses.
Here’s where the decision gets complicated. Unlike many traditional financial institutions, Clearbanc is willing to work with companies that are just six months old. Clearbanc also has no minimum credit score. Regardless of your business’s financial shape, most banks may refuse to approve loans with such little time in business and subpar personal credit.
Then again, the business financing industry’s standards have changed dramatically since Clearbanc’s inception in 2015. Six-month old businesses with outstanding cash flow and revenue may very well be able to access the low rates, long terms, and high borrowing amounts associated with bank loans. They just have to take the time to explore all of their options. Who knows? In just two or three years, even banks may begin prioritizing cash flow over credit score and time in business. The rest of the industry is certainly moving in this direction.
In summary, six month old businesses with outstanding cash flow and revenue should not assume that Clearbanc is the only advantageous option within their reach.
Main Competitors: Venture Capitalists
Clearbanc apparently has no intention to compete with banks and online lenders. The company’s founders and investors have made it abundantly clear that their intended competition is venture capitalists. Earlier, we noted that business loans did not become widely available for tech start-ups until fairly recently (i.e. a few years ago). In fact, many tech start-ups probably still believe that equity financing is their only option for substantial funding. It’s going to take a long time to eliminate the traditional notion that if your business is under two years old, advantageous business loans are out of the question.
Like debt financing, equity financing has numerous pros and cons. At the very top of the latter list is the difficulty of finding venture capitalists in the first place. Shows like Shark Tank make venture capital seem highly accessible. But the reality for many start-ups is that unless you already know the right people, even the most promising entrepreneurs often have trouble forging relationships with investors. Shark Tank also gives the impression that all it takes is one, game-changing meeting to secure venture capital. But anyone who has pursued venture capital would likely agree that it takes months of networking just to set up the first of several meetings, all of which may turn out to be a complete waste of time.
Clearbanc takes away all of that networking in exchange for a simple application. Funds show up in your bank account in a matter of days, rather than waiting months just to learn your desired investor has lost interest.
Clearbanc’s Mission to Close The Gender Gap
For some reason, venture capital firms do not prefer to work with female business owners. According to PitchBook’s VC Female Founders Dashboard, women-owned businesses are receiving just 3.1% of all venture capital. Companies founded by male and female partners are only receiving 11.7%.
Clearbanc is combatting this gender bias by judging applicants solely on the success of their businesses. In April of 2019, Forbes reported that Clearbanc has distributed eight times more working capital to women-owned businesses than the industry average.
Female business owners have had an unnecessarily difficult time obtaining business loans as well. This is largely because female business owners tend to have lower credit scores and a lower net worth than their male counterparts. Thankfully, Clearbanc is far from the only business financing company that is making a conscious effort to close the gender gap. A number of reputable companies currently offer special small business loans for women. These products help women who run successful businesses but have had trouble obtaining financing due to the two aforementioned setbacks. If you work with the right company, subpar personal credit and limited working capital won’t stop you from accessing the funds you need to grow your business.
Making Your Decision
The specificity of Clearbanc’s target clientele suggests that any business that strays from this group should look elsewhere for funding. This is especially true for businesses that are over six months old or businesses with strong personal credit. Do you have the cash flow and monthly revenue to qualify for Clearbanc but your business is at least a year old? If so, you can almost definitely find a business loan that is significantly more advantageous than Clearbanc’s merchant cash advance.
Also, owners of Ecommerce and SaaS companies should not assume that they have fewer options because they belong to non-traditional industries. These businesses are the future of the economy. If anything, the ball is in their court. When you’re taking the time to explore different options, business financing companies are developing better products exclusively for your needs.
Odds are, it won’t be long before another company is able to offer the same borrowing amounts and requirements as Clearbanc but for a much lower price. You just have to keep looking and remember that the offers are only going to get better!