OCX Open Capital Exchange

Frequently Asked Questions

About OCX

Our business model (and how we make money)

OCX is an online lending platform that connects business borrowers with investors.

Our revenue comes from two sources: an origination fee charged to the borrower (3%-5% of the loan amount), which covers costs associated with setting up each loan; and a servicing fee charged to investors (1%-2% of each payment).

Unlike banks and other lenders, OCX does not profit from the interest we charge. Interest paid by our borrowers goes directly to compensate the investors who participate in each loan. This structure means that our incentives are to efficiently and transparently find the optimal rates and terms to connect borrowers and loan investors -- NOT simply to charge higher rates.

Our name

OCX is short for Open Capital Exchange. (Why an “X” instead of an E”? We just think it sounds better!) Our name reflects our vision on two levels. First, we do business in an open and transparent manner. Second, we are building a platform that connects investors and business borrowers directly, which is closer to an “exchange” model than a traditional lender.

Borrowers

Terms and requirements

We are currently offering term loans of up to $100,000 for up to 12 months.

Our minimum requirements for business borrowers are:

  • In business for at least one year
  • At least $100,000 in sales over the last 12 months
  • Positive cash flow
We do require personal guarantees from business principals. We also take a security interest in business assets, though we do not require specific collateral.

Application process

Businesses seeking capital can apply through the online application available via our website at http://ocx.co/apply.

Our application incorporates information about the business and owners as well as business bank statements, tax returns and financial information.

Once a complete application is submitted, we strive to make a lending decision within one business day. Once a loan is fully approved and agreed to by the borrower, funding generally happens within one business day.

Syndicates: borrower perspective

A strong Syndicate helps ensure that a business borrower gets access to more capital on better terms. All else being equal, a business with strong Syndicate participation may get a loan at a rate as much as 50% below the rate for a business with weak or no Syndicate participation. (e.g. an interest rate of 10% instead of 20%.)

Business applicants can take an active role in building and managing their Syndicate. Applicants can invite people they know to join their Syndicate as part of the application process. Summary information about each loan applicant is made available to Syndicate members, and applicants can also respond to questions from Syndicate members on the OCX website.

Comparison with other sources of funding

OCX offers small businesses among the best loan terms on the market. In comparison to banks, we are quicker to decide, more likely to lend, and do not insist on collateral. In comparison to “alternative” lenders and quasi-lenders (like merchant advances and factors), our effective interest rates are generally far lower. Many of these alternatives don’t even quote an interest rate -- this usually means the effective rate is extremely high ( see below for more on how to compare different types of rates ).

How can we do this? We are focused on serving small businesses, and have developed a model that allows us to tap into the knowledge and judgement of local communities and investors. This gives us a unique edge in understanding our borrowers, evaluating risks and avoiding losses, which in turn means we can offer capital to reliable borrowers on better terms than our competitors.

Interest rates and fees

Our rates range from 6% to 30%, depending on the estimated credit risk for each borrower.

Unlike many of our competitors, we make our effective annual interest rate explicitly clear, including the only fee that we charge borrowers: an origination fee, which covers costs associated with each loan we fund.

Assuming payments are made on time, that’s it, although late payments may trigger other fees. We think you’ll find this as straightforward as anything on the market.

“Contracted” versus “effective” rates (and a note on “factor rates”)

The contracted rate is the interest rate that is charged on the outstanding loan amount (the “principal”) on an ongoing basis. The effective rate takes into account the origination fee, which is deducted from the funded loan amount at the beginning of the loan. Since the origination fee is associated with the loan, you should consider it as part of the cost of the loan and use the effective rate to compare different funding options.

To get an accurate comparison, be sure to include ALL fees associated with the loan. (This can be more of a challenge with some capital providers, who deliberately obscure the true cost of capital in order to make such a comparison difficult.)

Note that other measure like “factor rates” can be very misleading. A factor rate of 1.2 (meaning the borrower will pay back the initial amount plus 20%) for a 6-month loan with regular equal payments is the equivalent of an effective interest rate of over 70%.

How? First, you are only borrowing for 6 months. Paying 20% of a loan amount for 6 months is roughly equivalent to paying 40% for a full year. But in fact on average you only have half of the original loan for the six months! Remember: you are paying it back over six months. By the end of month 3 you’ve already paid back half. So double it again from 40% to 80% as a rough estimate of the equivalent effective interest rate. Yes, that’s pretty expensive capital!

Repayment process

For each loan, we set up an auto-debit process so that all payments are deducted directly from the borrower’s bank account. Generally, repayments are made in equal weekly installments over the life of the loan.

Repaying early

We do not charge prepayment penalties. If you want to pay a loan back early, for any reason, we make it easy to do so and we will not charge you any fees for doing so. For more information or to initiate an early repayment, please contact your loan officer or send an email to borrower@ocx.co

Borrowing additional money

If a loan is in good standing after 3 months, borrowers may be eligible to increase the loan amount or take out a new loan. To learn more, please contact your loan officer or send an email to borrower@ocx.co

Late fees

We do charge fees for late payments (generally $20) and we may increase the interest rates on loans that have defaulted. (Details on the the “default rate” are spelled out in each loan agreement.)

Changing payment details or if you cannot make a payment

If you wish to change your bank account or if you believe you may not be able to make a payment, please contact your loan officer or email us us at borrower@ocx.co

If we are unable to collect a planned payment without you warning us at least two business days in advance, this may trigger the “late payment” and/or “default” process as outlined in your loan agreement.

Investors and Syndicate Members

Investing in business loans on OCX

Investors in OCX loans typically see annual returns in the range of 10% to 20%. Once an investor creates an account and becomes an OCX Member, the investor can earn additional cash rewards for referring new borrowers and investors.

Investing through OCX offers several advantages:

  • A thorough credit evaluation, conducted by OCX, looking at both the business and owners
  • Automated payments and monitoring
  • Industry-standard legal documents
  • Industry-standard collection processes in cases of default
  • Easy diversification for investors
  • Market mechanism for setting interest rate
  • Comfort of participating alongside others who know the business borrower as well as professional investors and fund managers
Interested parties can easily set up an account on our website to learn about investment opportunities and incentives for referring business borrowers and other investors.

Once an account is set up, investors can view summaries of business loans that are open for participation. The minimum investment size is $1,000 per loan, and Members can choose to bid for any amount above that in $1,000 increments. To bid, investors must fund their account on OCX. Available cash can be withdrawn at any time.

Rewards for referring business borrowers

Generally, the best introductions come from people you trust. The same is true for business borrowers. And it is even more true when the person who is referring the business invests.

We consider these introductions so valuable that we offer substantial rewards for investors who bring new borrowers to OCX and then participate in the loan. In these cases, we offer a 10% bonus payment for each dollar invested after the loan is repaid, up to 1% of the entire loan amount.

Here is an example: Let’s say a Member, Julie, introduces a business to OCX that is approved for a one-year loan for $100,000 with an 18% interest rate. Anyone who invests $10,000 in that loan will get a stream of 52 weekly payments of $206.46 each, totalling $10,736 yielding a 15.2% rate of return. However, if Julie invests $10,000 she will get a bonus payment of 1% of the loan amount, or $1,000. This will bring her effective return to 34.8%, more than doubling it. (All of the above figures assume the loan is repaid on schedule and are net of OCX fees.)

Rewards for referring other investors

As with borrowers, we also value and reward investor referrals.

We offer referring Members 0.5% of the total dollars invested in the first year of a referred member’s new account, up to a total of $5,000 per referral. This money can be invested or withdrawn at any time.

For example, let’s say an existing Member, Julie, introduces a new member, Herbert, to OCX. As Herbert invests in loans, Julie earns rewards. Shortly after creating his account, Herbert invests $10,000 in a loan. We immediately reward Julie $50. Over the course of his first year as an OCX Member, Herbert invests $200,000, earning Julie a total of $1,000 in rewards.

How OCX loan investments are structured (and associated legal documents)

OCX loans are structured as syndicated loans. All investors are equal participants in each loan (“pari passu” in the legal language). To begin investing, each investor must complete and sign a Master Participation Agreement and an ACH Payment Authorization Agreement. All agreements can be completed and signed electronically on our website.

Credit evaluation and scoring

We conduct a thorough credit analysis before approving each loan, drawing on information that includes the borrower’s financial reports, bank transaction history, tax returns, and credit reports from national credit bureaus on the business and business owners.

We then use a credit model developed by one of the leading credit agencies based on records from over 2 million small businesses to estimate a potential borrower’s probability of default. Applications deemed too risky are rejected. To date, less than 40% of loan applications are approved. Applications that meet our risk criteria are then given a loan offer with a rate based on the risk as measured by the expected probability of default.

What if a loan defaults

In events of default, we first attempt to work directly with the borrower to recover the loan. If this fails, we then work with leading collections agencies to maximize recovery. All proceeds apart from third-party costs are passed on to investors.