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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.