Kabbage is an automated financial services platform that quickly supplies working capital to small and mid-size businesses. On average, from the time merchants land on Kabbage’s website until they have cash in their accounts, it takes seven minutes. “Our customers are very happy with us because we are saying ‘yes’ when a lot of banks are saying ‘no,’” reports COO and co-founder, Kathryn Petralia. “Banks do not have the tools and technology to profitably underwrite less than $100,000, and a lot of small businesses need $20,000 or $40,000, not $100,000. We serve small businesses that banks cannot.” To date, the firm, also founded by Rob Frohwein and Marc Gorlin, has conducted more than 100,000 transactions with customers.
Kabbage opens up many opportunities for merchants, enabling them to acquire inventory, hire seasonal help, make capital purchases, fund marketing to increase brand awareness, and more. “Our customers run the gamut. We have a strong concentration in retail, and we are moving into the offline space. There is a testimony on our website by Cheesecakes by Alex, and, like many of our customers, he is buying raw materials that he is putting into his products. We also have professional service providers and health care providers as customers,” Petralia shares.
Customers control fees
The company’s model is unique in the financial services space. Kabbage financing is a line of credit, and customers only pay for what they use. It is not a loan and does not require merchants to use their personal assets as collateral. Kabbage financing is structured as a cash advance against future sales, and the company does not charge a prepayment penalty. “Almost everyone else in this space has a fixed prepayment amount,” Petralia continues. “Every transaction is automatically repaid in six months; we automatically collect it from either their checking or PayPal account. Most of our customers repay us in around half the time required, so that is a big savings to them. The more quickly they repay, the less fees they incur.” Fees range from two to ten percent of the transaction amount in months one and two, and one percent in each of months three through six. The most a customer will pay in fees for six months is from eight to 24 percent.
According to Kabbage’s underwriting model, merchants must be operating a business, which the firm validates. “We are very excited about the automation component of our product,” Petralia adds. “Customers create an online account by providing an email address and then build their profile. If they are Amazon merchants, they add their Amazon data through an API, which authorizes Kabbage to access their transaction information. They also add their checking account data. If they are eBay sellers, we want to see their PayPal account. If they are offline merchants, we require their checking account information. This takes around a minute to gather.” Beyond this, there is a short application form and the firm pulls a credit report. Kabbage uses the information to make an automated decision about the retailer’s business performance and to determine the amount of capital it will extend. Once customers are approved, they can continue to expand their profiles in the Kabbage dashboard by adding more data sources, giving them access to more capital. The company maintains access to customers’ management, social, credit card, and other financial data, so it can continuously evaluate them.
Kabbage’s model seems to be very successful. The firm’s Net Promoter Score (NPS), a measure of customer satisfaction, is 70. The top tier NPS companies, such as Apple and Amazon, are at around 70, and AMEX is the highest rated financial services company at around 40. Kabbage gives its customers high scores, too. “We are excited about helping our customers to grow and how wisely they are using the money,” Petralia comments. “We are proud to service this important economic force.”