In small-business lending, two obstacles often arise: the owners of the businesses tend to have credit scores too low for bankers to touch, and information about small companies’ health frequently is stale by the time banks receive it.
"If you have a FICO score below 720, banks won't look at you for a small business loan," says Kathryn Petralia, co-founder and COO of Kabbage, an online factor that buys discounted receivables from small online merchants. "It's horrible, perverted logic because small business owners are highly leveraged — they're putting their homes on the line to get cash for their business — which artificially deflates their scores, and as a result they can't quality for traditional working capital. There's more to a small business than a credit score." She also notes that by the time a company's credit score drops, bad things have already happened. "You want to be in front of that."
Kabbage extends credit lines even to online retailers that they have poor credit reports. It's developed a high-tech platform for monitoring and analyzing small business sales data from Amazon, eBay and other online marketplaces in real time. Today, through an agreement with UPS, it's augmenting this data with shipping information.
"A bank sees a snapshot in time -- it may get financial statements from the customer, it may get a credit report, it may even have a personal guarantee," she says. "Imagine if a bank could get level-three transaction data to make credit decisions on their customers. That's what we get to see. We see every transaction, every item, how much it is, we can see if someone's trying to game the system by shipping the same item repeatedly." Kabbage also matches transactions between marketplaces and PayPal accounts, to ensure that the PayPal account the customer shares is the one in which they're actually transacting and getting paid.
The UPS data will help Kabbage verify customers' identity. It will also help the firm understand if the customer is bigger than previously thought, and therefore deserving of a larger capital line. "It helps us see a broader picture of their business," Petralia says. For instance, some online retailers sell on marketplaces that Kabbage doesn't track, such as Ruby Lane and Bonanza; the UPS data will show those additional sales.
The deal benefits UPS because customers know they can get additional access to capital when they ship more with UPS. "The idea is to make it benefit UPS as much as it benefits Kabbage," says Petralia. Kabbage will only look at the shipping data of its customers who provide consent.
In Kabbage's lending process, small businesses fill out an application online and authenticate the marketplaces at which they sell (such as eBay). They authorize those marketplaces to share data about their sales with Kabbage; they also authorize PayPal to share information about and access to their PayPal account. An automated decision engine crunches the numbers and if the business qualifies, Kabbage puts cash in an amount ranging from $500 to $40,000 in the PayPal account. In addition to PayPal, Kabbage also uses the automated clearinghouse to handle payments for customers who sell on Amazon.
The site can profitably offer small advances because its acquisition costs are low and its process is automated, Petralia says.
If a businesses' numbers trend way down, Kabbage can throttle back and take back some of the cash in the PayPal account. "We're not giving anyone any more capital than we know they can repay within six months," she says.
The company has 15,000 customers and recently advanced its 10 millionth dollar. "That's not huge by big bank standards, but we're pretty excited about it," she says. Its customers are "ridiculously diverse," Petralia says — there are sellers of comic books, tie-dyed tee shirts, Native American jewelry, and toy and model trains, among other products.
As part of its strong relationship with PayPal, Kabbage will be announcing in December that it will be one of the payment company's first five partners for its "fabric" — technology that weaves payment technology in with other merchant software.
Although Kabbage is not profitable yet, Petralia says, "We could be if we stopped building new stuff. But we're really building a data platform." She characterizes Kabbage as a technology company, and says half of its 42 employees are developers.
This year, Kabbage has four main objectives: to be able to cover all online marketplaces; to integrate with payment processors; to start lending to offline businesses ("small businesses that are offline also interact with the web all the time, through Facebook, Twitter, Yelp, and Quickbooks, and we can use all that information," Petralia says); and global expansion, starting with the U.K. "There's nothing like this in the U.K., or in the U.S., for that matter," she says.