How Clearbanc Works
Clearbanc provides growth capital to e-commerce businesses. Here is a financial framework to help you evaluate them as a partner.
Clearbanc started in the startup scene with bold ambitions to help empower entrepreneurs by accessing growth capital not provided by traditional banks or VCs. They have deployed over $1 billion in capital and from the outside looking in, seem to have their shit together. I have been using Clearbanc for the past year and wanted to help entrepreneurs evaluate them as a partner. It’s extremely important that we feel safe with partners who have access to our growth metrics and financial data- which is why I wrote this article.
What is Clearbanc?
Clearbanc lends money to companies and gets paid back a daily percentage of sales until the loan is paid off. They charge a flat interest fee and also provide cash back, based on where you spend the money. They also launched a new angel investing tool recently.
How do they adjudicate?
The company leverages integrations with popular e-commerce providers such as Shopify and Big Commerce. They also integrate with payment processors such as Stripe to pull revenue numbers as well as your bank account.
This data is fed into their algorithm to adjudicate. It essentially will figure out a rough form of EBITDA on your stripe / bank balance to fund your growth. I’m not sure how advanced the algorithm is since the funding amounts spike on a monthly basis.
A larger portion of their team is then rounded out by “investment analysts”, essentially customer success folks with a crash course on finance. They usually check in on your business monthly, when new offers arise and when Clearbanc launches new products.
How does Clearbanc work?
Variable 1: Interest Rate or fee (12%)
Clearbanc provides a set amount of capital with an added fee (typically 12% ), and provides cash back if you spend it on their ecosystem of vendors.
Variable 2: Fee Reduction Products (0-9% cash back )
For example, if you use the capital to spend on FB/Google Ads, your fee will net out at 6%. Even better if you use Snapchat Ads, it can net out at 3%!
6% effective fee on preferred vendors card spend (inclds. Marketing - FB, Google, etc)
9.5% effective fee on non-preferred vendors card spend (suppliers, etc)
+3% invoice fee on above (9% preferred vendor invoices, 12.5% non-preferred vendor invoices)
3% effective fee on all Platinum Partners (Pinterest, Share-A-Sale, Snapchat, etc.)
Variable 3: Calculate your APR
For everyone like me who forget first year accounting class, APR refers to the annual rate of interest charged to borrowers and paid to investors. Key word here is annual.
Clearbanc will typically give you 3 options to choose when borrowing money from them. The fee is calculated at 12%, pre the cash back incentives.
$57,500 at 15% rev-share with $8,625 fee
$60,000 at 17% rev-share with $9,000 fee
$65,000 at 18% rev-share with $9,750 fee
$72,500 at 19% rev-share with $10,875 fee
The Clearbanc fee of 12%, only calculates the fee at a point of time. For an accurate analysis of interest, you need to plug in this data with how long it would take you to pay off this loan. That’s why you should always look at Clearbanc’s loans in APR.
Below I calculate an example using a 6% fee, essentially if you took all the money and dumped it into FB Ads.
The variable here is how fast you will pay off this loan:
Fast = Higher APR
Slowly = Lower APR
Let’s Walk Through Examples
Scenario 1: High Growth [20% m/m]
$57,500 at 15% rev-share on FB Ads [6%] = $3,450 fee
Total $60,950
APR: 13.33%
Scenario 2: Low Growth [5% m/m]
$57,500 at 15% rev-share on FB Ads [6%] = $3,450 fee
Total $60,950
APR: 10.29%
Summary
So what is the big fuss? Clearbanc’s APR fluctuates based on how fast you are able to grow your company. What’s genius about this model is that it is tied to revenue sharing, and no entrepreneur will want to slow down growth purposely.
Where Clearbanc gets tricky is when you play around with the following variables:
High Revenue Growth = Higher APR
19% Rev-Share = Higher APR
Deploy Capital on the right channel for cash back
Once you figure out your game plan, always make sure to compare CB’s APR to a bank loan or competing alternative lender.
Do I recommend Clearbanc?
Yes. They make funding easy.
They don’t run credit checks on founders.
Offers scale with the company-they provide top-ups on an ongoing basis based on company growth.
It’s simple to compare their loans to other banks/lenders
If you need help evaluating Clearbanc as a partner; feel free to reach out bukhtark@gmail.com
Disclaimer: I have raised Capital with Clearbanc previously. I also worked on their early ad campaigns in July 2018.