How Kabbage Crowdsources Credit Scores

Kabbage advances cash to EBay sellers based on user feedback

Are people who build criminal empires in the online game Mafia Wars a better credit risk than those who milk cows and plant crops in FarmVille? An Atlanta startup called Kabbage aims to find out. The company advances money to online merchants who sell goods such as clothing, model trains, or handicrafts on EBay,, and Yahoo! so they can buy inventory and expand their businesses. To assess creditworthiness, Kabbage’s computers analyze data such as transaction history, user feedback ratings, and soon, game and social-media participation. “When I first saw [Kabbage’s risk modeling], I thought, ‘My God, somebody is going to pay a lot for that information,’ ” says Warren A. Stephens, chief executive officer of investment bank Stephens and an investor in the startup.

Small online merchants tend to carry a lot of debt and can be slow to repay, hurting their credit scores and scaring off traditional lenders. They’re also reluctant to pledge personal assets such as houses or cars as collateral, which most banks require. Kabbage (the name comes from a slang term for money) doesn’t require collateral, and by checking a merchant’s online profile the company can determine in minutes how much cash it’s comfortable offering and what to charge for the service. “What better credit information do you want on a retailer than to see their daily transactions and whether they are meeting their projections?” says Bryan Stolle, a general partner at Mohr Davidow Ventures, which in August took the lead in a $17 million investment in the company. Other backers include Stephens, BlueRun Ventures, TPG Capital’s David Bonderman, and United Parcel Service.

Once merchants are approved, Kabbage puts funds in their PayPal accounts. Kabbage, which isn’t a bank, makes only cash advances, not loans. The company plans to test doubling the amount it advances, to $40,000, says CEO Robert J. Frohwein. Kabbage isn’t yet profitable, though it has more than 4,000 clients. Given difficulties in getting bank loans, “these merchants don’t have anywhere else to go,” Frohwein says. While a few customers have been late in making payments, he says Kabbage has yet to write off any advances.

Kabbage gets repaid directly from the merchant’s PayPal account, which is linked to another funding source such as a checking account. That means Kabbage can track its clients’ transactions to see whether there’s enough cash for the next payment, says Kathryn Petralia, the company’s chief operating officer. With access to PayPal, Kabbage can “go in and get the money if we need to,” she says. A six-month advance—the maximum—costs merchants between 10 percent and 18 percent of the original balance. In July, Kabbage was awarded a patent for the processes it uses to assess risk.

This fall, Kabbage will start examining merchants’ interactions with customers and friends on Facebook and Twitter and participation in games such as Zynga’s Mafia Wars and FarmVille to see whether there’s a correlation with on-time repayment. “The number of fans a customer has, the frequency of new posts, the ratio of ‘Likes’ to ‘Dislikes,’ and possibly the relevance of whether or not a customer plays FarmVille vs. Mafia Wars could be meaningful and predictive,” says Kabbage Chairman Marc J. Gorlin.

One repeat Kabbage customer is Val Prescott, founder of an online shoe store called Old Rebel Boot Co., which refinishes and sells cowboy boots on EBay. Working with her daughter and granddaughter, the 78-year-old Prescott buys discarded footwear in bulk for $1 to $3 per pound. After repairing and polishing the boots in her Minneapolis workshop, she sells them for $50 to $500 per pair.

Prescott has taken out several advances from Kabbage. She now sells 125 pairs of boots per week and has 2,500 pairs in stock, vs. an inventory of 300 to 400 pairs before she started using the service. She recently took another $10,300 from Kabbage to buy more boots and build her own website. “Before I found Kabbage,” Prescott says, “if someone called and said ‘I have 30,000 pounds of boots. Do you want them?’ I would put my head in my hands because I wanted them so much but had no way to buy them.”


    The bottom line: Kabbage examines user feedback on EBay to determine credit risk and decide how much cash to advance to its 4,000 customers.

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