Since 2011, Kabbage has advanced money to successful Amazon.com (AMZN) sellers, EBay (EBAY) merchants, and others who do business online but have a hard time getting bank credit. By crunching applicants’ transaction history, user feedback, and social media interactions, Kabbage assesses their riskiness and offers financing in a matter of minutes.
Kabbage isn’t just targeting online sellers anymore: The Atlanta-based 100-employee company today announced it’s using QuickBooks data to make cash advances to brick-and-mortar businesses. Chairman Marc Gorlin says the company will take advantage of Intuit’s (INTU) popular accounting software, which has more than 4 million small business users, to analyze sales, payroll, and other data with “eyes wide open.” Many factors, such as a company’s hiring history and the number of vendors it works with, help inform Kabbage’s financing decisions. “It’s not any one data point; it’s tying it all together,” says Gorlin.
Gorlin says Kabbage’s average financing is for about $18,000. Kabbage doesn’t lend: It makes cash advances. In return, clients pay from 2 percent to 18 percent on the advanced amount, and Kabbage pulls payments directly out of its customers’ accounts.
Kabbage, backed by investments from Stephens Inc. Chief Executive Officer Warren Stephens and TPG Capital founding partner David Bonderman, is the latest in a series of alternative financing businesses to promote plans to expand.
On May 1, On Deck Capital announced that Google Ventures, PayPal (EBAY) co-founder Peter Thiel, and others had invested $17 million in On Deck, which uses electronic cash flow records to underwrite working-capital loans to small businesses that banks usually avoid. The next day, Lending Club said Google (GOOG) was leading a $125 million investment into the company, amid news that the peer-to-peer lender was getting ready to start offering small business loans. Last week, startup Funding Community unveiled its site for crowdfunding small, short-term business loans.
One factor propelling all these new spins on alternative financing geared at small businesses: tight credit. While there are signs that banks’ small business lending standards have loosened a little, difficulty obtaining credit is often blamed for the gap in hiring at small businesses and larger corporations. How wide is the gap? Here’s what Steve Matthews reported in Bloomberg News last week:
Companies with fewer than 20 workers increased employment by 3.8 percent from February 2010 to April 2013, while the largest companies—with more than 1,000 on their payrolls—expanded their workforces by 8.6 percent, according to data compiled by Moody’s (MCO) and ADP Research Institute.
Part of the problem, as Matthews reports, is that the community banks that have traditionally provided the large part of small business lending have been slow to recover from the financial crisis, despite a Treasury program intended to get small banks lending again. This is difficult partly because even small banks aren’t equipped to provide the kind of short-term financing in small amounts that alternative funders like Kabbage specialize in.
Gorlin thinks banks could take advantage of Kabbage’s technology to increase their financing options. “We want to bring automation to the banks,” he says, “whether it’s through a white-label product or they do it through Kabbage.”