[Finance1]

recently saw an article that claimed there bad debit was at 5%

I wonder what their metric is for that calc. We keep it simple. A 5% bad debt ratio means that 5 cents out of every dollar that goes out the door doesn't come back. Other companies will calc it by 5 cents out of every dollar due back doesn't make it.

Regardless, OnDeck is running on thin margins with the initial funding. They have tiered price but in simpleton terms I see it like this:

1.20/6 = 1.23+/- after their 2.5% origination fee is netted.

10k deal = $9,750 funded and $12k due back ($2,250 gross margin)

6% commission: $600
5% bad debt (my calc): $487

This leaves $1,163 before overhead and cost of funds. Not much left on the bone. Any company would die with these kind of returns.

Renewals are mathematical magic and make up quite a bit on margins though so the calc above only applies to the first funding to a new merchant.

OD "forgives" interest @ renewal but it's a bit of a joke because interest remaining @ renewal is quite small compared to the built in "fees". So they double factor to a degree on their renewals. They would have to anyways or they would bleed out pretty quick.

I know many here know the math but for those who don't, this is a pretty simpleton approach:

Renewal @ 60% on a 10k deal = $4,800 balance less $200+/- forgiven interest renewed back to $10k (less 2.5% origination) w/ $12k repay = $5,150 net to merchant but the cost to the merchant for the new funds is $2,250. So the rate on the renewal is actually 1.44+/- on the new money. It's the dirty little secret of this business. Do that a couple times in a row on the same merchant and the gross margins start to look pretty sweet.

The reason why it's so easy to get away with this is because conventional thinking is the balance owed at the time of renewal is a "principal balance" but it isn't that way at all because the balance that is being paid down includes all the deal costs from the beginning. Merchants rarely catch it because it "looks normal".

A simple way to analyze return in a new $10k deal that renews just once looks like this:

$9,750 funding with $12k repay.

Merchant has paid back $7,200 @ 60% renewal time.

Merchant nets $5,150 at renewal

Merchant pays back $12k on the renewal and calls it a day.

So, the merchant receives a total of $14,900 and pays back $19,200 in under 10 months. This = just under 1.29 return on the money. Each time the merchant renews it ups the roi factor because renewals are much more expensive than the first deal.

Capital exposure works heavily in a funder's favor too because the funds going out the door @ renewal is recycled money. No new exposure is incurred. It's actually lower than the $9,750 originally funded.

Think of exposure like this (in simpleton terms):

$9,750 exposed during the initial funding. $7,200 is paid back @ renewal so exposure is down to $2,550. $5,150 goes out the door so the exposure on the renewed deal is only $7,700. I know it's more complicated because of commissions and things like that but just trying to keep it simple.

In the example above the funder only needed to have $9,750 available to make a gross return of $4,300 over 10 months.This is a 44% ROI on $9,750 in 10 months. Compound this by always keeping all your money out on the street and gross potential ROI keeps going up. This simple math is why I don't think OD is "in trouble" so to speak. They just keep churning away like everybody else. It becomes a science once you've mastered your own risk model and manage costs.