Online lender Kabbage offers small businesses short-term lines of credit. Borrowers apply with a quick online application and by linking their business checking or PayPal account to Kabbage. Businesses can choose to give Kabbage access to additional accounts including Etsy, Square, QuickBooks, Xero and eBay. Kabbage makes a lending decision based on data from those accounts and says the more information borrowers give, the more money they’ll likely get. Within minutes of applying, borrowers can obtain a line of credit up to $100,000 that they can tap when they need to fill cash-flow gaps, meet payroll or purchase new equipment.
Kabbage started in 2009 and is one of dozens of new alternative lenders offering capital to small businesses that don’t qualify for traditional small-business loans. (Others include OnDeck, Lending Club and Prosper.) Online lenders charge higher interest rates than banks because they’re willing to work with riskier borrowers. If borrowers can qualify for a small-business loan from a bank, they should choose that option instead of a high-interest online loan.
But online lenders can provide businesses with a “quick bridge” of capital while they invest in expansion, says Charles Green, managing director of the Small Business Finance Institute and author of “Banker’s Guide to New Small Business Finance.” For example, a restaurant could use capital from an online lender to fund a new outdoor seating area. The additional seating would likely lead to increased revenue, allowing the restaurant to pay off the loan and still turn a profit in the long run. Green advises business owners to have a strong understanding of their financials before turning to an online lender.
“They need to understand the cash flow cycle of the business so they’re not living hand to mouth forever,” Green tells NerdWallet.
On the whole, small businesses have been relatively slow to consider online lenders a funding option. Only 23% of small businesses have used an alternative lender, while more than 70% have sought more traditional financing options, according to a February 2015 survey by Manta, a business directory with forums and promotional tools to help businesses get found online. The survey asked 1,287 small-business owners who were Manta members questions about their funding options.
“A lot of people are confused about what alternative lending is,” Manta Chief Executive Officer John Swanciger tells Nerdwallet. “I actually think it’s going to take those lenders reaching out and educating small-business owners.”
To help shed light on how online lenders operate, NerdWallet talked with Kabbage’s co-founder and head of operations, Kathryn Petralia, about how Kabbage lines of credit work and how small-business owners should use them.
NerdWallet: How does Kabbage use data to underwrite loans?
Petralia: Our objective is to take advantage of lots of different data that we collect that may not seem meaningful on its surface but actually turns out to be meaningful in practice. For example, what type of computer are you using to access our site? Are you on a mobile device? If so, what type of mobile device, and what time of day are you accessing the site? All kinds of interesting things like that, combined with all of the actual data that our customers are giving us about their actual operations.
What you can learn over time is the performance of customers who access the site at certain times of day or on a certain type of device. We can learn that certain devices may yield a more profitable portfolio or a less risky portfolio than other devices. The more data we get, the better our decision is and often the more capital we can give borrowers.
How does Kabbage get the qualitative data about businesses, such as what type of device they’re using?
All of that is delivered via the browser and the device. It’s amazing how much information you can collect about people who are coming to your site that they don’t even know they’re providing.
For example, there’s the IP address from which you’re accessing the site on your device. Does that IP address match the address that you’ve provided to us? That helps identify potentially fraudulent applications.
You mentioned social data. Can businesses also link their social media accounts to their Kabbage profile?
Customers can add social media accounts during the application process and after they qualify. We don’t use social data to make a primary decision. What we have found, though, is customers who have active Facebook and Twitter business accounts are 20% less likely to be delinquent than those who don’t. We believe that it’s actually a measure of reciprocal engagement between the businesses and their customers because they’re using it to communicate product information or promotions and specials, or to resolve disputes. A business that’s actively engaging with their customers is probably running a better business.
Can you explain what a Kabbage score is and how it’s calculated?
The score is complex because we have so many different data sources that we’re using to make a decision that every applicant looks a little bit different. We use it to understand the customer’s borrowing capacity, to determine their character and the likelihood that they’re going to repay that loan, and the consistency of their business performance over time.
How is Kabbage’s loan fee calculated?
Every fee that we charge is based on the amount that the customer borrows. The advantage of a line of credit to a business borrower is they can take as much as they need when they need it, and they only pay for what they use.
We charge, on average, 4.5% of the transaction amount over a 30-day period. Businesses can pay it off in 30 days, or they can keep it for as much as six months. If they keep it for six months, they’re going to pay an average of 13% of the transaction. The line size and the fee are based on the Kabbage score. Some of our customers qualify for 12-month products as well, and that’s something we’ve recently rolled out. [Borrowers could expect to pay about 26%.]
What happens if a business doesn’t pay Kabbage back in time?
We have a team of folks that works with our customers who are struggling. Many times, they’re experiencing a disruption in their cash flow, and then we work with them to come up with a plan that allows them to satisfy the obligation and still take care of their business.
It could be that we put them on an extended payment plan – it really depends on every business. I have revenue specialists who work with every customer individually to understand what their cash flow is and when they anticipate they’re going to have revenue. Sometimes we’ll move the payment date in order to accommodate some sort of unusual cash flow glitch that they have.
It doesn’t do me a lot of good to be a jerk to people who can’t pay me. Most of the time, it’s not because people don’t want to pay, it’s because they can’t. That’s a really important distinction. Many times, working with thecustomer actually helps them stay in business, which is really important to us.
Are there late fees?
We charge a late fee every month the borrower is late. There’s no late fee for businesses with a balance less than $36. For balances of $36 to $499, the late fee is $10 a month. For balances of $500 to $4,999, the late fee is $35 a month. For balances of $5,000 or more, the late fee is $100 a month.
Does the rate go up for businesses who are late?
No. Having said this, customers’ rates can vary over time, so it’s possible that a customer who is consistently late may also demonstrate other behaviors that cause their rate to rise. However, we do not have delinquency pricing.
What type of businesses are best candidates for a Kabbage line of credit?
We have literally almost any kind of business you can imagine: nail salons, yard services, law firms, manufacturers, people who make hats. Any kind of business with cash flow. As long as you’ve been operating your business for a year and you’re generating a couple thousand bucks a month in revenue, then we can work with you.
The revenue floor is a little bit flexible – it depends on some of the data we receive and when we see the revenue, because we understand that a lot of businesses have seasonality. If we see one $40,000 transaction in a one-year period, that’s not really awesome. We want to see some consistency of revenue on a regular basis.
Are there types of businesses that a Kabbage line of credit isn’t best for?
As is the case with any borrowing, it should be used as a revenue-generating asset. That could mean that you have a cash flow gap. Maybe you need to borrow in order to make payroll because you had to hire some people and you have a huge order coming in, but you need to pay them first and you know the revenue is coming.
Using it to pay your rent isn’t the best use of the capital. Using it to buy equipment, to upgrade your product or business or service, those are all fantastic uses.
Is there any other advice you’d give to a small-business owner thinking about applying for a Kabbage line of credit?
Consistency is key. It’s really important that you use the same bank for a period of time. If you’re using an accounting platform, use it consistently. Whether you’re going to a bank or you’re going to Kabbage or you’re going to another provider, it’s going to make it so much easier for them to understand your business performance if they don’t have to shuffle through a lot of different accounts and different information. To have all of your data organized and accessible is the No. 1 thing you can do to help your success of getting approved for a small-business loan – not just from Kabbage, from anyone.
We’re curious – where does the name “Kabbage” come from?
Cabbage is a Depression-era euphemism for cash. We spell it with a “K” for two reasons. One, it was much cheaper to buy the domain with a “K” than it was with a “C” when we started the company. The other reason is we like the “K” – it’s kind of cool and quirky.
For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Teddy Nykiel is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @teddynykiel and on Google+.
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