When we first first wrote about Kabbage just over a year ago, it was a fledgling endeavor with only eBay merchants as customers. But Kabbage now serves merchants who use Yahoo! stores, Etsy, Amazon, and Shopify, as well as eBay. In July Kabbage will be launching in the U.K., its first foray outside the U.S. Kabbage has roughly 20,000 customers and 80 percent are repeat users.
Established in 2009, Kabbage's growth is attributable mostly to the indifference traditional lenders show to very small businesses. "Banks will not lend to anyone with a credit score of less than 720," says Kabbage's COO and co-founder Kathryn Petralia. The process is time-consuming, involves filling out a lot of forms, and usually a small business is still turned down. If a line of credit is approved, the small business owner usually has to put up personal assets — such as a home — as collateral.
Kabbage's Funding Criteria
Kabbage's criteria for extending credit are very different from traditional banking standards. The company does not turn down anyone with a bad credit score as long as the applicant meets the minimum monthly revenue requirements. Customers do not have to pay application or origination fees. And Kabbage has very little delinquency according to Petralia. "Our biggest surprise was how cash-starved small online businesses are." Acquisition of inventory is the main use of Kabbage funds, with about 75 percent of customers using it for that purpose. Merchants are often offered volume merchandise deals at substantial discounts but they need to purchase and pay immediately. Often they don't have the cash flow to take advantage of the opportunity. That's how Kabbage helps out. Other uses of funds are marketing and seasonal hiring.
As for the large difference in interest rates between traditional bank loans and Kabbage's rates, Petralia states, "Our customers care much more about access to capital than fees. It's more of an ROI [return on investment] conversation than an APR [annual percentage rate] conversation." Since its inception, Kabbage has actually lowered its rates. The lowest rate was five percent for 30 days when Kabbage started; it is now down to two percent.
Kabbage can approve a line of credit and transfer funds to a merchant's PayPal account within an average of seven minutes. "Our businesses are more than just a credit score. A large, or even a small bank, cannot originate a loan of less than $100,000. It isn't economically feasible for them. Kabbage offers lines of credit as low as $500 up to $40,000," advises Petralia. The company is testing higher limits. Kabbage's largest customer generates $8 million in annul revenue.
The company wants its customers to build a profile. Petralia counsels that the more data customers can make available, the better their chances of receiving greater amounts of capital. In September 2011, Kabbage introduced Social Klimbing, which gives small businesses access to capital based on social network activity. Social Klimbing allows customers to connect their Kabbage accounts to Facebook Fan pages and Twitter feeds. As customers increase followers, activities, and buzz on Twitter and Facebook, they will automatically gain access to more funds.
Last month, Kabbage and UPS entered into an agreement to let small businesses direct UPS to share their shipping histories with Kabbage. This gives Kabbage visibility into the entire volume of shipping business their customers conduct. Currently, Kabbage does not see sales for offline or mail order sales. The larger volume can potentially make it possible for Kabbage customers to obtain more capital at lower rates.
Also, UPS Capital has extended a new debt line to Kabbage, specifically intended to fund small ecommerce businesses. UPS is also an equity investor in Kabbage, through its Strategic Enterprise Fund.
This year Kabbage's goal is to aggressively pursue data relationships with platform providers. "We want to be on all the marketplaces. We want to be able to help customers wherever they sell," says Petralia. Kabbage will be integrated with Magento in future, according to Petralia.
Now that Amazon is a partner, funds can be moved to customers via ACH — because that is what Amazon uses — as well as PayPal. Kabbage would like to partner with other payment processors as well.