Kabbage finds a way to support emergency loan program

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Kabbage, an online lender that recently stopped lending after being routed by economic fallout from the coronavirus pandemic, has started accepting applications for the Paycheck Protection Program.

The company’s leaders hope that by helping to distribute the program's funds they will help small businesses bounce back and rehire workers who were furloughed.

Kabbage stopped lending on March 29 to give itself time to upgrade its systems and teams to support the Paycheck Protection Program, which is being administered by the Small Business Administration and the Treasury Department. It also cut off credit lines to customers after many of its small-business borrowers went out of business due to challenges presented by social distancing.

Kabbage furloughed an undisclosed number of its 500 employees and shut down its operation in India.

The lender said Tuesday that its systems were ready to handle PPP applications and that it has already recieved 37,000 requests. It is working with an unnamed bank to fund the applicants.

Kabbage had to upgrade its systems because the PPP requires data and documents the lender normally doesn't have. Nine documents must be provided, including the Form 941 from the IRS.

Kabbage had to provide a way for applicants to upload the documents and apply optical character recognition to extract relevant data from the documents. It also had to adjust its Know Your Customer and Know Your Business systems.

Kathryn Petralia, co-founder and COO, Kabbage
"The bad guys always come out in full force in bad times," Kathryn Petralia, Kabbage's chief operating officer, says of the potential for fraud tied to the Paycheck Protection Program.

“One thing we are excited about is that we are going to be able to fairly easily manage a lot of the onboarding processes for KYC, KYB and fraud mitigation,” said Kathryn Petralia, a Kabbage co-founder and its chief operating officer.

“That's one of the things that folks are really worried about," Petralia added. "The bad guys always come out in full force in bad times. So we feel like we're going to have a great line on that. It's one of the reasons that a lot of banks today are only offering these PPP loans to their existing borrowing customers, because they know they've already gotten through the process of verifying those customers. And it's too hard for them to do this at scale any other way.”

Kabbage, which will offer the loans to new and existing customers, should have an advantage because it’s used to automated lending decisions, Petralia said.

“If you look at the 30 million small businesses in the U.S., 90% of them have fewer than 20 employees and 80% have fewer than 10 employees,” she said. “They're looking for very small amounts. It's very hard for any manual process to serve all these small businesses that need small amounts at scale.”

Very small businesses will likely be left behind as banks initially grant loans to bigger existing customers, she said.

“There's going to be a rush” for the PPP funds, Petralia said. “The problem is it's the long tail that's going to be left behind. If this fund isn't further funded, they're the ones who are going to miss out.”

The Treasury said Tuesday that it will ask Congress to commit another $250 billion to the Paycheck Protection Program following concerns that the first $349 billion could run out by early June.

Petralia hopes that helping with the PPP will enable Kabbage to rehire employees and recover from recent events.

“It helps us in a few different ways,” she said. “It helps us because a rising tide lifts all the ships. If we can get small businesses across the country the capital to stabilize their businesses, then that helps the economy. And of course we can generate some income from running these processes.”

Like other lenders, Kabbage is waiting for clarity from the government on certain aspects of the program, including the calculation for payroll qualifications.

“We have lots and lots of questions in to the program about how these loans will actually be funded and booked,” said Sam Taussig, Kabbage's head of global policy.

“There's still clarifications required on the back end about the collection process and forgiveness calculation," Taussig added. "And additionally, Kabbage is still awaiting an opportunity to apply as a direct lender with the SBA where we would be able to originate the loan with the SBA guarantees.”

Kabbage, like others, also wants more details about the Federal Reserve’s recently announced Main Street Lending Facility.

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