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What does Specified Percentage or Purchased Percentage Mean?


Ten Percent of Small Businesses That Sought Financing in 2021 Sought a Merchant Cash Advance

April 18, 2022
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A whopping 10% of small businesses that sought financing last year sought out a merchant cash advance, according to the latest study published by the Federal Reserve. That figure was up from 8% in 2020 and 9% in 2019. For the the preceding years, that figure had held fairly consistent at 7%. [See 2015, See 2017]. Market penetration, therefore, has arguably increased by about 40% since 2015.

fed reserve data
Above: Results from the 2021 Fed study

Meanwhile, the percentage of applicants that sought out leasing has gone down over the last seven years: from 11% in 2015 to 8% in 2021. Factoring has hovered around 3-4% consistently.

The pursuit of of loans and lines of credit decreased dramatically from 89% in 2020 to 72% in 2021. And approvals have gone down across the board. Approvals on business loans, lines of credits, and MCAs hit a peak of 83% in 2019 and plunged to 76% in 2020, the first year of Covid. The figure fell even further in 2021, down to 68%. Online lenders and large banks had the lowest approval rates overall, at 51% and 48% respectively.

The full most recent Fed Study can be viewed here.

Q&A with Isaac Wagschal on One Percent Ventures’ Intentions to Transform MCA

October 21, 2021
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One Percent Ventures, a loaded name with implications depending on who reads it, is the latest small business funding company to enter the fray. No, it’s not funding for the one percent, but rather the numerical percentage the company would make off first-time clients with near-perfect performance. They’d make just one percent…

The concept, which caught the attention of deBanked, had to be explained in detail, especially when a merchant paying only $500 on a $50,000 advance was communicated as an example. Say what? The catch is in a rebate and the cost independent of the broker’s commission. Nevertheless, One Percent Ventures CEO Isaac Wagschal seems to be bringing in a new concept, one that was originally supposed to be 0%, he says, but he was already stuck with his company name. deBanked did a Q&A to find out exactly how it all works.

– The Editor


Isaac Wagschal
Isaac Wagschal, CEO, One Percent Ventures

Q (Adam Zaki): Why did you choose the name One Percent Ventures?

A (Isaac Wagschal): The original idea for One Percent Ventures wasn’t to be a funding company that gives one percent deals. Originally, we were going to provide branding and marketing services to small businesses who do not have any marketing, but can benefit from it. Our compensation was to be a one percent partnership in the company. Then a situation came my way where I was able to form a team of people with extensive knowledge and experience in the MCA space. I grabbed the opportunity and switched from marketing to funding small business.

We designed the product with a rebate that refunds basically the entire cost of the first advance. I realized that if we changed the rebate where instead of refunding 100% of the 1st advance factor cost, we keep 1%, I wouldn’t have to change the name and logo of the company. This is the reason our merchants are now paying one percent. If I had not already determined the name, the merchants would have been paying zero instead of one percent.

Q: What was the most difficult part of the shift from marketing to funding?

A: Shifting from marketing to funding was very difficult because of the nature of the market which existed at that time. That difficult transition forced the creation of our unique product, which includes rebates and payment-pauses. I looked into the mainstream MCA product in-depth, and realized that from a marketing point of view the product is flawed, and cannot be marketed properly. The more I scrutinized the MCA industry, I realized that the problems are not just from a marketing perspective. There are existential problems that need to be addressed, or they will eventually cause the demise of the industry altogether. Default rates are so high that mathematically the industry is forced to charge extremely high prices. This makes the product unmarketable to merchants who are not in the absolutely highest risk bracket.

I knew that unless we remade the product to be more attractive and marketable to a larger market share, the funding industry had no tangible room for expansion. Why would we want to get into this market space in the first place? As a team, we agreed that instead of hiring ISO-reps and underwriters, we would first hire accountants, actuaries, and data analysts.

We applied the same psychological principles used in marketing, where you try to predict and manipulate people’s reactions. By doing that, we were able to redesign the old MCA product. We introduced a rebate system that gives the merchant an opportunity to potentially only pay a $500.00 factor cost on a $50k advance. In this way, we expanded the current market share, and turned it into a hot product. I hear from ISOs on a daily basis who recontacted old unsuccessful leads, and turned them into deals after they presented the OPV-rebate and payment-pause-award system. This proved that the OPV product is expanding the market share.

Q: What are your thoughts about the market share in MCA?

A: The current market share consists of the absolute highest risk merchants who are willing to pay such high prices. It is becoming harder and harder to maintain deal flow. This has forced the industry to slowly keep raising the standard with respect to how many positions we are willing to accept. If nothing happens, we will soon find ourselves talking about 10th and 15th positions. This is certainly not sustainable, and puts an amazing amount of stress on the ISOs who are working tirelessly to maintain deal flow. They see it all happening, but feel helpless because at the end of the day, they can only present a product that a funder puts on the table. The tiny market of willing and able merchants is also a source of stress, and a key factor to the mistrust that is largely present between ISOs and funders.

Q: What are your thoughts on a relationship with the ISOs and funders?

A: Let’s face it, the way the current ISO-Funder relationship is set up scientifically creates a conflict of interest. It is simple math – when a funder loses a renewal that carried a potential profit of 50k and thinks that the deal could have happened if not for the 14 points that is reserved for the ISO, there is a natural conflict of interest. You can be honest with your ISOs and even give Rolexes and call them your partners on paper, but the spreadsheet still calculates a conflict of interest at the end. The lavish gifts are nice, but they do not eliminate the scientific conflict of interest.

We have corrected this fundamental problem by designing our business model so that our ISOs are genuine partners. This too is simple math – when a funder’s product is designed to issue an unheard-of large rebate, and 3rd party costs are deducted from the final rebate amount, the merchant will obviously be super happy because of the astronomic refund. More importantly, by using this model, the conflict of interests between ISO and funder is erased because mathematically the merchant paid the commission, not the funder!

Q: How does OPV make money? How do merchants qualify for all of your incentives? What are these incentives?

A: Let me first answer the latter part and explain how our product works and then I’ll come back to answer how we make money.

Our typical product is a ninety-day term at 1.49 sell rate. At mid-term, if the merchant didn’t miss any payments, they are eligible for an add-on, largely known as a renewal. At this phase, we begin to issue an OPV-Pause award after each cycle of four consecutive successfully completed payments. The pause awards can be submitted smoothly on our automated online system either one at a time, or they can be saved and initiate a pause for an entire week. After the final payment, if the merchant didn’t miss more than three payments, excluding the pauses, we refund the entire factor cost of the first advance except for 3rd party fees, processing fees, and 1% of the advance, which gives us only $500 profit on a 50k advance.

Every merchant that qualifies for funding, automatically qualifies for all the incentives. The OPV funding model is actually designed to perform better when more merchants actually receive the rebate. Why? Because that also means there has been a drop in the default rates. If every merchant was to qualify for the rebate, it would mean we had a zero percent default rate, which would allow us to make a healthy return, even if we made profit only on the 2nd advance.

This is precisely the reason we added the OPV-Pause awards. It is in our best interest to keep the merchant motivated to stay current on their payments, in order to qualify for the rebate. We even added a condition that in the event a merchant doesn’t have an unused pause award, they can purchase an OPV-Pause for 20% the daily payment. The goal must be to lower default rates so that we can lower the end cost. In this way we can expand the market share and keep the MCA industry alive. The OPV product is designed to do just that.

Q: What are your immediate goals for OPV? How about long term?

A: Phase I was designing the product and building the platform. Now in phase II, we plan to fund deals for at least a year before making any significant changes. We want to build relationships and earn trust by being transparent and honest, even when it hurts. At phase III we will analyze the data and make tweaks we deem necessary. At phase IV, given that the canary returned from the coal mine, we will share our intelligence, and license the OPV platform to reputable funders throughout the MCA industry.

Q: What is your outlook on the future of the non-bank small business funding/lending sphere?

A: In an effort to truly make a constructive change towards preserving the MCA industry, I will speak openly about the elephant in the room. We are all aware of the unfavorable new laws and regulations that constantly threaten our existence. As long as there are politicians who need to win elections, they will be on the hunt for “do-good projects.” There will always be a lobbyist that is looking for deal-flow, who is willing to provide the perfect “do-good” project. One of those will be – “Let’s save the poor merchant from the greedy funder.” The politician can only succeed because the nature of the MCA industry is such that our funders share only the good news. The bad news is confidential, so there is a stigma of excess profit in the MCA sphere. If we can successfully change that stigma, then we will be a thriving industry for many years to come.

Forty-Four Percent of Small Businesses Were More Than $100,000 in Debt in 2020

February 5, 2021
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old main streetFifty-three percent of firms expected total sales revenues for 2020 to be down by more than twenty-five percent because of the pandemic, according to the latest small business survey published by the Federal Reserve. Eighty-eight percent of firms indicated that sales had still not returned to normal.

Of those hurt by shutdowns, supply chain troubles, and government shutdowns, 26% percent closed temporarily, fifty-six percent reduced their operations, and 48% percent modified their operations.

Fifty-seven percent of firms characterized their financial condition as “fair” or “poor.”

The struggle to remain open sent firms further into debt. Seventy-nine percent of firms had debt outstanding, an 8% increase from 2019. Debt also increased; the share of firms with more than $100,000 in debt rose from 31% to 44%.

The majority of U.S. businesses believe the next year will be rife with the same struggles as the last. Many believe weak demand, government shutdowns, and supply chain breaks will continue disrupting the world economy.

Overall, firms applied for financing less, from 43% in 2019 to 37% in 2020.

Firms got their funds this year through Government aid programs, and they did so through their pre-existing bank relationships, forgoing alternative funders. Forty-eight percent went through large banks for PPP, 43% to smaller banks. 95% and 83%, respectively, already had a relationship with their large or small bank.

Square Capital Made More Loans, Maintained Default Percentage, Continued to Show Why They’re A Tough Competitor in Fintech Loan Market

February 22, 2017
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Square has continued to set itself apart in the fintech lending space. The company announced Wednesday that Square Capital had facilitated 40,000 business loans for a total of $248 million in the fourth quarter of 2016. And they did that while holding their default rate at 4%.

A look at their recent loan volume compared to their competitor OnDeck:

2016 Square OnDeck
Q1 $153,000,000 $570,000,000
Q2 $189,000,000 $590,000,000
Q3 $208,000,000 $613,000,000
Q4 $248,000,000 $632,000,000

Square Capital’s biggest competitive advantage is that they have practically no acquisition cost for their borrowers. “We’re able to upsell and cross-sell to our base of millions of sellers with minimal incremental cost,” Square’s Q4 earnings presentation says. Their payment’s customers, which they can convert to borrowers, processed around $50 billion in transactions last year.

Square had a net loss of $171.6 million across 2016 however, the bulk of which originated in the first quarter. The net loss for Q4 was only $15 million.

Annual Percentage Rates Fail Business Owners, Again

September 16, 2016
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APR Metric Worse Than Total Cost of CapitalA survey of small businesses once again revealed that Total Cost of Capital (TCC) was a better metric than Annual Percentage Rate (APR) when choosing a small business loan. This study, conducted by Edelman Intelligence on behalf of the Electronic Transactions Association (ETA), found that a majority of respondents stated that they would look to minimize TCC, rather than APR, when considering loan options in the face of a short-term ROI opportunity.

The ETA explained this in the report as follows:

Generally, when consumers take out a loan, they are not making an income-generating investment that would increase the funds available to pay the loan back. Therefore, in most situations, the more “affordable” loan for a consumer is one with a longer term and lower monthly payments, even if it results in paying more over the long term. Consumers, therefore, look at APR, which describes the interest and all fees that are a condition of the loan as an annual rate paid by a borrower each year on the outstanding principal during the loan term. APR takes into account differences in interest rates and fixed finance charges that may otherwise confuse a consumer borrower and is most useful in comparing similarly long-term loans, such as 30-year mortgages or multi-year auto loans. Likewise, APR is useful for comparing revolving lines of consumer credit, like credit cards, where the amount borrowed each month changes. APR allows consumers to compare the rate at which an outstanding balance would increase under different credit cards.

While APR describes the cost of the loan as an annualized percentage, TCC represents the sum of all interest and fees paid to the lender. As the Cleveland Federal Reserve recently noted, TCC enables a small business to determine the “affordability” of a product – a key driver for most small business borrowers. Unlike consumer loans, commercial loans are normally used to generate revenue by helping a business purchase equipment or inventory or hire additional employees. Thus, “affordability” for small business borrowers means assessing the cash flow impact of the loan and comparing the TCC of the loan and the return they expect to earn from investing the loan proceeds. To reduce TCC, many small business borrowers prefer short-term financing they can quickly pay back with the return on their investment (ROI).

The ETA’s full report can be VIEWED HERE.

The findings are consistent with other studies:

When Comparing Loan Options, Small Business Owners Say “Total Payback Amount” is Easiest to Understand; APR and Factor Rate More Difficult

Fed study on small business borrowing

A debate with anecdotal evidence, demonstrating people’s inability to calculate an APR

Consumers also struggle to make sense of APR, according to a 2008 Fed study

An old debate on twitter regarding APR vs TCC

Should financial literacy be a requirement in school curriculums?

June 24, 2022
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classroomMichigan recently became the 14th state in the U.S. to mandate high schoolers to take a half-credit finance education course before graduating. This mandate was put into effect by the HB 5190 bill signed by Gov. Gretchen Whitmer just last week.

“As a mom, I want every kid who graduates in Michigan to enter the world with a diverse set of skills and knowledge, and that must include financial literacy,” said Whitmer.

Along with Michigan; Alabama, Florida, Georgia, Iowa, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Rhode Island, Tennessee, Utah and Virginia all require high school students to take personal finance courses.

According to a survey conducted by Next Gen Personal Finance, 22.7% of US high school students will have guaranteed access to a personal finance course. An additional 48.2% of students in 2022 have access to one either as an elective or as a possible option to fulfill a graduation requirement. Only 4.87% have no access to any financial education in any of their courses.

In non-guaranty states, personal finance courses were least likely to be available in city areas with only 1 in 20 receiving personal financial education. In rural areas, that figure increased to 1 in 7. The numbers also fluctuate based upon the schism in location, race, and socioeconomic status.

The importance of financial education early on can’t be overstated as the benefits of it seem to wane into adulthood, almost to zero.

According to Mariel Beasley, principal at the Center for Advanced Hindsight at Duke University and Co-Director of the Common Cents Lab (CCL), “Content-based financial education classes [for adults] only accounted for .1 percent variation in financial behavior.” She added, “We like to joke that it’s not zero but it’s very, very close.”

The Single Most Important Problem that Small Business Owners are Facing

June 16, 2022
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nfibInflation is now ranked as the single most important problem that business owners face. According to a survey conducted by the NFIB last month, 28% of respondents ranked inflation as the biggest problem, beating out nine other categories including poor sales, cost of labor, and taxes.

A year ago, only 8% of respondents cited inflation as the most important problem. Small business owners have been forced to raise prices because the supply of their own goods have increased to an all time high. The increase in prices has been more prominently felt in wholesale, manufacturing, retail trades, and construction.

Close behind inflation, 23% of business owners complained that the quality of labor available was actually the most important problem. That was only down 3% from where it was a year ago. Along with all the other problems business owners must deal with, they are now worrying about the quality of their products not being produced at their best. Sixty-one percent of owners reported few or no qualified applicants for the positions they were trying to fill which seems to be why labor quality is currently a point at issue. Thirty-three percent of owners reported few qualified applicants for current open positions and 28 percent reported none.

The least important problem that business owners seemed to be worried about is finance & interest rates, which was listed at 1%. Last year the percentage of that being an important problem was the same at 1%.

Who Needs The Merchant Cash Advance Keyword Anyway?

May 31, 2022
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Google MapsAlmost five years since Google banned its search engine from displaying ads when queries contain the phrase “cash advance,” the loss of business attributed to that has probably been nil to the small business finance space.

According to Google, despite there being between 100,000 to 1 million searches for “cash advance” each month on average, only 1,000 to 10,000 searches per month are specifically for “merchant cash advance.”

People are ~10x more likely to search for business line of credit, business loan, working capital, or business credit card, according to Google’s estimates.

This is somewhat in line with findings from the Federal Reserve, whose recent study determined that 7x more business owners seek out a loan or line of credit than they do a merchant cash advance.

But putting that aside, the ban on paid advertising for all things cash advance has had an upside for some lucky companies. Without ads, Google has inadvertently (or maybe intentionally) elevated funding providers that are local to the searcher to the top of the organic results. That means listings on Google Maps that contain keywords matching the search queries are reaping the benefits of being prominently placed at the top of the page and are potentially capturing all the clicks along with it. The end result is an old-fashioned SEO war to win what few searches there are.

Compare that to a search for sba loan where paid advertising is fair game. In the era of PPP and EIDL, it’s perhaps no surprise that there are between 100,000 to 1 million searches per month for that keyword on average. Many of those searchers will probably not be eligible for an SBA loan so perhaps the next best fit would be equipment leasing or invoice factoring, two queries that are on par with merchant cash advance in average monthly searches, meaning volume is relatively low.

But how does low search volume turn into the large volume of funding originated? Well, another factor has changed since Google implemented the cash advance advertising restriction in 2017, and that is that Google is not as relevant as it used to be. Business owners are more likely to discover a potential capital source from social media or a fintech platform they already have a relationship with than ever before. According to a recent study, 25% of people claimed they had actually used either Alexa, Siri, or another voice assistant to find information about financial services, signaling a major departure from how traditional searching used to be conducted.

All of which means that the paid advertising restriction on a niche keyword on Google is unlikely to make any kind of difference in the big picture. Odds are you might not have known this restriction even existed. Bing, on the other hand, has no qualms with cash advances and allows paid advertising on it.

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percentage for psf's or additions to their set up fee, but regardless if they do or not it's going to cost you that merchant or potentially even endanger the repayment if they don't net enough (this is really high risk stuff i'm talking about, but i have seen guys wack a 3k origination fee on a guy we funded for 10k). , , someone pointed out that certain places will allow you to add to their contract set up prior to drafting, and it's true.. i've done that before, which is also segways into another lesson of being aware of every funder's specifics from product space to buy rates, terms, commission allowances etc. it's key to know where you have maneuverability and how to place deals so that they not only get funded but it maximizes profit for you too. after all.. we all play this game to get paid right?...

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