In 2008, Chris Byrne had just found his rhythm selling vintage guitars on eBay when the credit crisis hit and the bank yanked his line of credit. The Huntington Beach, Calif., entrepreneur ran into a common predicament among online merchants: His one-year-old business, The Gear Geeks, was doing well, but without access to cash he couldn’t ramp up his inventory in a meaningful way.
Then in 2010, he saw an ad for working capital from a company called Kabbage. Figuring he had nothing to lose, he set up an account, and gave Kabbage access to his eBay sales history, seller rating and other information. Less than 15 minutes after seeing the ad, he had $5,000 in his PayPal account, ready to be deployed for inventory.
Two years later, he has used and paid back $200,000 in advances to more than double his monthly sales volume to about $50,000 and expand his repertoire beyond guitars. “Before I was buying one instrument at a time,” says Byrne, who typically takes an advance of $7,000 to $15,000 and repays Kabbage within a month. “Now I can liquidate entire studios.”
Online merchants like Byrne were exactly the group Kabbage founders Rob Frohwein, Marc Gorlin and Kathryn Petralia, had in mind when they came together in 2009 with the idea of offering financing to the millions of small businesses that sell primarily via eBay, Amazon, Yahoo, Shopify or Etsy.
Until Kabbage came along, this group of retailers had few financing options. Their loan amounts are often small and the typical approval time is long. Plus, most lending institutions look at little beyond credit scores to determine if a small business is worthy of a loan — and, as Gorlin points out, online merchants tend to have artificially low credit scores because they often rely heavily on personal credit cards to buy inventory.
Kabbage, by contrast, considers a much broader range of data when looking at a prospective client — and information about online merchants is readily available. “In every eBay transaction, there are more than 300 data points we can look at,” says Gorlin, who is chairman of the 56-employee company based in Atlanta.
Though it was initially tough for the founders to get backing of their own, they’ve since gotten big name buy-in, raising $26 million from Mohr Davidow Ventures, UPS Strategic Enterprise Fund, and TPG Capital founder David Bonderman, to name a few investors.
Kabbage financing resembles a line of credit in that customers only pay for what they use, but it isn’t a loan and doesn’t require merchants to use their personal assets as collateral. Rather, as with a business factor, a Kabbage financing is structured as a cash advance against future sales.
“Factoring receivables is one of the oldest models in trade financing,” says Paul Kedrosky, a venture capitalist, blogger, and senior fellow with the Kauffman Foundation. “They’ve taken an old model and added an online twist.”
Instead of charging interest, Kabbage takes a percentage of sales for each month an advance is outstanding. For merchants who pay back the cash in one month that fee will range from 2% to 7% of the advance amount. If they take the full six months, they’ll pay 10% to 18%.
“If you have better credit, more time, or more access to capital there are much cheaper sources of capital,” says Kedrosky. “That’s not to take away from what they’re doing. This opens doors to online merchants who have not had the same access to financing.”
Kabbage does check credit scores, but that’s one of dozens of factors it uses to determine whether businesses are worthy of advances, which range from $500 to $50,000. “As long as you’ve been running a business effectively for a period of time, you won’t get turned down based solely on credit score,” says Gorlin.
Since launching the beta version of the site in 2010, Kabbage has provided more than $23 million in working capital and signed up roughly 30,000 online merchants. The average pay-back time is 4.5 months. Delinquency rates overall are just 5% — versus an industry average of close to 10%. The company’s revenue, meanwhile, is growing 20% a month.
Kabbage is currently focused on online merchants, and at the end of this summer will roll out in the United Kingdom. Still, now that more and more traditional retailers have an online presence, it could eventually make its model of financing available to brick and mortar businesses.
Most recently, in fact, the company has also given merchants the option of linking their QuickBooks Online accounting software, UPS shipping information and Facebook and Twitter accounts. Doing so is optional, but merchants who choose to share additional information can qualify for more cash. Kabbage, meanwhile, is studying this new data for correlations between, say, shipping trends or Twitter followers and credit worthiness.
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Already the company has found that merchants who link their Facebook or Twitter accounts to Kabbage have 19% lower delinquency rates than Kabbage customers in general. Gorlin surmises that merchants who use social media the right way do a better job running their businesses. “Small businesses can’t afford CRM [customer relationship management] software but realize that they can use social media to take care of their customers and stay engaged,” he says.
What’s the value of a Facebook “Like?” Kabbage is trying to answer this very new-age question. For the moment, Gorlin is satisfied with this theory: “It’s better to be liked than not liked.”