Johny Fernandez: Hey, what's going on everyone? I'm Johny
Fernandez.
Sean Murray: I'm Sean Murray. And today we're gonna talk about
how you can save money by learning from Johny Fernandez on
how to make chocolate chip cookies.
Johny Fernandez: We'll get into that after our segment, cause
there's ways to save money when it comes to chocolate chip
cookies, but first, we're gonna dive into a topic that I think
it's definitely informative and it's educational, especially for
the newcomers in the industry. Let's talk about split funding.
Sean Murray: Sure, yeah. So this is a little bit different from.
Yeah, this is not a not a cooking show. But so what is
split funding. So split funding is a methodology that a business
can use to pay an advance that it has taken typically, in
today's online lending world, a business, a borrower is going to
pay back via a direct ACH debit, the lender is gonna make a debit
to the bank account, every month, could be a bank too
doesn't have to be an online lender. And if it's a merchant
cash advance, then they're going to take a debit, typically daily
or weekly, it could be fixed, it could be variable. But then
there's another way of doing it and the other way of doing it is
actually the old fashioned way. And that's by taking a
percentage of the credit or debit card sale, that a business
transacts every day. So if someone is gonna go into, let's
say, a small business, like a store, and make a purchase using
a credit card, typically, the proceeds from that transaction
will be deposited in the business's account, minus the
fees, right. But in a split funding transaction, a portion
of that sale, some predetermined percentage, will then be taken
and applied to the outstanding balance of the advance. And so
that's what split funding is.
Johny Fernandez: So, Sean, quick question, how did this all come
about into our world? Because obviously, this came in, you
know, right, kind of the start of when everything started to
change. So how did it come into, you know, practice? You know,
how did this all come about? Split funding?
Sean Murray: Sure. So it's actually the genesis of what I
believe to be all of alternative lending, all have alternative
finance. And that's because we're talking like 20 plus years
ago, in the late 1990s, you had credit card processors who were
out there, and they had lots of small business customers, and
the small business customers would say, you know, is there
any way you can like, lend us money? We went to our local
bank, they said, no, we have a relationship with you. Is there
anything we can do? And I think the answer is typically no,
that's not what we do. We don't provide financing, we just
enable you to accept payments. That's all that we do. And I
think that they looked at it as sort of like a lost opportunity
that perhaps they could provide some type of financing, and use
the framework, and the structure and the relationship that they
already have to their advantage. So they weren't just gonna all
of a sudden get into the lending business and start making loans,
they would look at it as how about this, we'll give you an
advance on what you would typically make in a month on
your credit cards and debit card sales. And then you'll pay it
back by us taking a percentage of your credit and debit card
sales going forward, until we've recovered the amount that we've
given you plus like a fee on top. And this started, like I
said, 20, 20 plus years ago, the company that was really famous
for it was called Advance Me which today is CAN Capital. And
if I'm not mistaken, they started doing it as far back as
1998. Meanwhile, the concept of splitting the payments apart and
directing it to two different places, or three different
places that actually started in the 1980s. So like a quite a
long time ago, but it really didn't become mainstream in any
form or fashion until the late 90s. And it really took off,
because this was a way of providing capital to a small
business, where the risk was removed, of the business's cash
flow and credit history. Because if you're a bank, the risk to
you is that you're gonna go in to try to debit the account at
the end of the month, and the payments gonna bounce. Or it
could be the other way around, you're gonna say mail me a check
every month towards your loan, and if they don't mail you the
check. What are you gonna do, then you all of a sudden, you're
a creditor like everybody else, right? And you're just a lender,
like everyone else. And that's not that's not what they that's
not what they wanted to be doing. So they removed the risk
of both of those things by simply taking a percentage of
the card transaction, which they knew were gonna happen because
they had, they could see the history of the business
transacting they take a percentage from the beginning
before it's ever deposited in the business's bank account. And
that allows them to get paid while removing the risk that a
debit is gonna bounce, or that the business is gonna fail to
send in a check.
Johny Fernandez: Yeah, so let's talk about nowadays. I mean, you
know, new business owners, business owners that are
recovering, how is this something that can benefit them?
Sean Murray: So that's a good question. So we've had this
whole like we've had several iterations since that time. The
whole process of taking a percentage, at least 10, 15, 20
years ago was kind of labor intensive, very manual, you had
to work with a credit card processor that was compatible
with doing it all, you couldn't just say, hey, send me a
percentage, they're gonna be like, who are you, you know,
right, or the credit card processor, might be aware of it,
but they're like, it's not really something we want to
participate in. Because there's a lot of credit card processors
out there. And so it kind of stole, you know, the stole the
show and kind of won the day, so to speak, was people returned
back to the old fashioned style, just debiting bank accounts and
willing and then being willing to take the risk on those
transactions being rejected, right on having an NSF there
being overdrafts and so forth, or the customer not making a
payment. And so all that risk kind of just returned, and
everyone's for the most part doing ACH, again. But new tech
companies saw the old model and they're like, wow, that was
really smart. Yeah. Why did that go away? And Square, PayPal. So
like, let's just do that. Yeah. Let's just take a percentage of
our customers sales, and we don't have to worry about credit
risk and how much money is in the bank account. Because we're
gonna get paid no matter what, right? Now, some of these
transactions are structured as loans. But we're just talking
about split funding. And that's the taking the percentage aspect
of it. And so these companies, these tech companies, they take
a percentage, it works for both it works for both parties. And I
think you were asking like, you know, why is this still
beneficial today, right? Well, I think it's very beneficial
today, the whole idea of having a fixed daily debit, whether
it's structured as an advance or a loan, kind of assumes that
your cash flow is always going to be more or less the same. And
in practice, it doesn't always work out that way. Obviously,
things like a pandemic could happen, right, which totally
changes your cash flow day to day versus historical, you could
be a store and you can have construction happening outside,
you could have a bunch of people call out sick, and you're just
not able to handle the sales, you know, the people coming into
the store that day, and you have people anything happen. Yeah.
And so the whole idea is that no matter what happens, you're just
gonna remit a percentage of whatever you draw, without
having to worry about it is kind of a relief for people. And in
my experience. Now, this is a very long time ago. But when I
was an underwriter a very long time ago, I used to underwrite
split funding transactions. And I would hear from business
owners who would tell us that it really didn't felt it didn't
really, it didn't feel like they were paying anything at all.
They were getting a lump sum of cash. And then they were just
getting their deposits every day from their credit card
processor, like normal, less a certain percentage. Yeah. But
it's almost like they didn't really feel the impact, because
they didn't have to do any work. You know, it was it kind of
saved them all the all the bookkeeping aspect of it. And
they liked it. And, you know, we just we put out a story, just
recently that said, that business owners still continue
to appreciate this methodology.
Johny Fernandez: Yeah. And it's something kind of like you said,
the big picture is, you know, you, it's like, you have to put
into it, but you're not going to really feel the work in the
sense where, you know, you don't have to really do much, it's
automatically just coming to you.
Sean Murray: You're not writing a check at the end of the month,
like, oh, I gotta make another payment, right?
Johny Fernandez: Everything's just coming back to you.
Sean Murray: Yeah.
Johny Fernandez: Would you say, the approach and just working
like that? Is that something you'd recommend for you know,
people like, business businesses?
Sean Murray: Yeah. And so you would say the short answer is
yes. And I would appear to be a very biased person to say that,
because while we write about it all the time. Yeah. And a lot of
our customers do that. So you're like, well, of course, Sean is
gonna say that, but believe it or not, I have actually taken a
loan, or maybe it was an advance I don't even remember. But I got
it from Square. This had to be about probably about five years
ago at this point. And I can't remember the exact reason why I
needed capital, but I didn't need that much. It was kind of
too small for the bank. And the bank was going to take too long.
And I'm like, hey, why don't I try one of these? You know,
like. Yeah. Online loans, or MCAs myself, I write about them
all the time. I used to underwrite them, I used to sell
them, right? Surely, if they really work, they will work for
me. Or maybe they won't, and I will have been proven wrong. All
this time. I thought it was actually a really good
experiment. But at the same time, I actually kind of needed
it. Right. And so I took one and it was very easy. It was and I'm
not even promoting Square per se, but it.
Johny Fernandez: This was an example that you went through.
Sean Murray: Yeah, this is real life scenario. This was Square.
I opened up my Square app because we accepted Square
credit cards. And it said, I was like, there was like a button
that said I was pre approved. I can't remember the amount I want
to say was like 20 or $30,000. And it was like, tap, tap. Like
you want the money. Yes, tap here, to like, deposit it. And
that was it. There wasn't anything else to it. Yeah. And
then from that point on, they would took a percentage of my
credit card sales up until I paid that amount back plus a fee
on top. And so it worked great.
Johny Fernandez: It worked, yeah. So you didn't, it wasn't a
hassle.
Sean Murray: No, no, no, yeah it was the opposite. I actually
thought it was too easy. That was my.
Johny Fernandez: It was too good to be true.
Sean Murray: Yeah, it was it was. Yeah, I thought it was too
good to be true. And I almost thought it was too easy. As in I
was surprised that nobody called me Yeah. Nobody checked to see
if I was still going to be in business. I mean, in the fine
print, I'm sure I signed, you know, saying that everything was
gonna be the same. Yeah. I don't even remember. Maybe that's part
of why I thought it was too easy. It was literally just
like, tap tap done. I documented it. You know, there's, there's a
story on our website. I wrote about it at the time has to be
like five years ago, but look up. I think the name of the
story is I Got Funded. Yeah, look, look it up. I got I got
funded. Yeah. And I talk about how it was, it was so easy. It
was almost too easy. But you know what, I ended up doing it a
second time. Okay. Yeah.
Johny Fernandez: So you paid everything off based off of the
transactions that you did?
Sean Murray: Yeah. So it wasn't like I, it wasn't like I took
more before I paid off the first one. I paid off the first one.
And then for whatever reason, I don't I don't remember what,
what what situation arose. I thought to myself, I'd like to
do another. And I totally got it from the standpoint of a small
business owner, why you would do this. Yeah. Because it worked
for me. And it's obviously not gonna work for any for
everybody. And one thing I will say in that is that the cost of
the funds was higher than one would get from a bank, although
the terms I was offered were not terrible and terrible is always
gonna be subjected. Yeah. It depends on what your situation
was. And the amount that I paid, I felt was reasonable for what I
was trying to accomplish. And that's how I look at it at the
end of the day, if I can accomplish what I want to or
make money off of off of it, then the cost. Isn't that huge
of a factor if I'm net beneficiary of the deal? And,
you know, I appreciated the payback methodology it took it
took, it was a huge relief, not having to worry about at like,
oh, my goodness, I have to send in the payment. But of course,
most people do auto debit now. And I didn't have to worry about
auto debit, either. I didn't have to worry about is there
enough money on this day when they make my debit? Yeah. They
just took a percentage automatically.
Johny Fernandez: That's awesome. And I'm curious to know, do you
know the interest rate?
Sean Murray: So that's a great, that's a great question. I did
not. And people would say, Sean, how could you not have known the
interest rate? How could you not? I think the real question
is Sean, did you know the APR. Correct. And the thing is, I
didn't know the APR APR, I knew the factor rate. So on one of
them, I paid a 109 factor, which is really good. That's nine, 9%.
That's not the APR. But I had to pay a 9% on top of what I got,
right? A lot of people will consider that very good. Some
people would consider that terrible if you try to boil it
down to an APR it's gonna end up being more than 10% talking
about double digit APR, probably. But I don't even
actually know. Yeah. And in today's world, we're led to
believe that if we don't know the APR, then we're stupid. And
we did something that we don't understand. And we got taken
advantage of. Yeah. I didn't know what the APR is. And my
literal name on Twitter is finance guy 74. I wasn't just.
Johny Fernandez: Follow him.
Sean Murray: Yeah, I have all the best financial advice. I
don't know what I pay. I don't know what my APR is. But follow
me for all your financial financial advice. And I went to
school for accounting, finance, these are things I could have
easily calculated, you know what, I didn't care, it didn't
matter. It's an arbitrary number that has no bearing on on what I
was going to do. Literally nothing literally means nothing.
It could mean something to other people. I don't want to diminish
it entirely. But in my circumstances, that number
literally meant nothing.
Johny Fernandez: And you paid everything off. You didn't have
to, you weren't stressed about it, because you took a
percentage from your sales. You were okay with that, you did it
again.
Sean Murray: And here and here I am. Yeah.
Johny Fernandez: Will you do it again, if you needed to?
Sean Murray: So, if a situation arose. Yeah. sure. I would. It
wasn't like I have decided since that, oh, no, you know, I
wouldn't do any more of those, I would if the situation arose.
But I think what happened next, when the next time there was
such a financial need, the amount of capital I was seeking,
just exceeded what an online lender like Square was able to
offer. And so I ended up having to go to a bank, unfortunately.
And I learned that everything they say about banks is true. It
literally took me three months, literally, and visits to the
bank branch and all paper documents to get this what I
would thinks an easy transaction done. It was a real pain and I
had to think about it all the time and do all these phone
calls, talk to underwriters and sales people and dig up all
these tax returns, you know I had all that stuff. But I know
three months is a long time, all this work was a long time.
Johny Fernandez: Versus a click.
Sean Murray: Versus click, click right. And so the difference was
the bank, the bank financing was cheaper. And I got a lot more.
And then the other side was I got less and it cost more.
There's a value to this, cause I can just get it instantly. Yep.
And if it makes sense, honestly, I would. I'll do it again. Yeah.
And I think that other business owners, you know, should
probably consider it too. If it's one of the options on the
table, as long as the financing makes sense. But split split
funding, I think it should continue to stay part of the
ecosystem. I think that it will, I think that the reason that it
existed from the beginning, or you know it was born into
existence, made total sense. Square didn't know anything
about lending. They didn't know anything about they didn't even
call me, I assume they did something, right. But they
didn't have to worry about whether or not I had money in my
account, because they they saw I had it like a year or two,
whatever, however many years it was of credit card sales, and
then they knew that my transaction volume was somewhat
predictable, you know, they knew what my business was. And
they're just taking a percentage automatically when I processed
those cards, that was the most important thing for them. Right.
And so that's a very, very, very powerful mechanism. And I
believe that it's going to be around I would think, forever.
Johny Fernandez: Yeah. Yeah, that's awesome. And if you want
to check out Sean's story about him getting funding, you can go
to debanked.com. And also, you can use and check out other
website information, you know, company information, also
stories, videos and other series that we've done. So it's
definitely one of the best sites out there besides google.com.
Sean Murray: And if you want to know where to get the cheapest
chocolate chip cookies, he's the guy to talk to you can follow
him on social media as well. You know, all your all your
supermarket tips. He's full of them. He was telling me all
about it right before we went on the air.
Johny Fernandez: Awesome. Look us up on social media platforms.
We have an Instagram, a Twitter, Facebook and LinkedIn. So follow
us on those platforms. So that's all we got for today.
Sean Murray: Hope you enjoyed hearing all about split funding.
I'm Sean Murray.
Johny Fernandez: And I'm Johny Fernandez, and we'll see you
next time.