It’s an exciting time for FinTech: financial technology companies. Anyone who does any banking at all will see how antiquated the financial services system is. I’m almost as irritated when I get back from a bank as I am when I have to go to the post office.
This has made it ripe for disruption from a host of technology companies, such as PayPal, Square or Prosper, each offering an improved version of services that you might have traditionally gotten from a neighborhood bank.
Kabbage.com, a FinTech company focused on lending to small businesses and consumers, is one of these disrupters and they reached out to me to talk about what they’re offering.
What They Offer
Kabbage provides people with a line of credit, based on their credit rating and business activity as provided by their accounts on Paypal, eBay, Etsy, Amazon, etc. After an analysis of this data, with a focus on the business activity occurring in these various accounts, they provide customers with up to $100,000 which can be borrowed as needed, for 6 or 12 month terms. Customers can repay early and borrow again at a later date – just like a traditional line of credit.
How’s This Different?
My wife and I are currently looking to buy a third investment property and have been talking to a variety of lenders. Lots of local banks simply won’t lend to anyone for investment properties, but the only way to find this out is to call, track down a loan officers and try each one – it’s a pain. I can’t imagine going hunting for a lender to raise cash for an eBay store!
Beyond this, even the lenders who would lend to us, each wanted to go through an extensive process, answering dozens of questions and sending them reams of paperwork.
Additionally, lenders will often want security – something of value that they can take if you don’t repay a loan. Whenever you get a mortgage or a car loan this is implicit.
A big part of Kabbage’s value proposition is that you contact them, provide them with your name and address and access to your account history at these various services and they then give you convenient access to capital, on demand. As well, this is an unsecured loan – you don’t have to provide any assets.
Kabbage provides an overview of the lending process on their website.
Who Would Use This?
To my mind, the ideal customer for Kabbage would be someone who is doing some sort of entrepreneurial activity and they have an opportunity they want to take advantage of.
Imagine that you’re a flipper – you buy used stuff cheap and resell it online – and you find out there’s an amazing comic collection that you can buy for $5,000 in the next 5 days. You know you could resell it for $20,000, but you simply don’t have the $5,000 to buy the collection.
With Kabbage, you’d borrow the $5,000, sell enough of the collection to repay the loan, interest and fees then sell the rest of the collection at your leisure as pure profit.
Alternatively, imagine someone selling their crafts on Etsy and one of their items gets featured in a magazine and they get bombarded with orders. They don’t have enough in stock or enough money to buy the materials to fulfill these orders. They don’t want to delay shipping out the items, in case the buyers’ enthusiasm wanes – so they borrow money from Kabbage, buy supplies and hire some short term help, then repay the loan with the proceeds from their sales.
I can’t imagine either of these people having any luck borrowing from a brick-and-mortar bank – they might get laughed out the door.
Kabbage expects lenders to have been in business for at least 1 year, have over $50,000 in revenue and to have a business checking account.
How Much Does It All Cost?
Kabbage’s fees range from 1.5% – 12% monthly, as well as repayment of principle (1/6th per month for the 6 month term or 1/12th per month for the 12 month term). There’s no fee to apply, and your fee rate is disclosed before you agree to receive the money. There’s a calculator on their how it works page that details the fees and repayment schedules.
Some potential customers complain about this cost with Kabbage, comparing it to the much smaller interest rate you might pay on a mortgage or car loan. To me, this is really comparing apples and oranges. OF COURSE borrowing from Kabbage is going to cost more than you pay on your mortgage! Kabbage is making loans to people for business purposes that traditional lenders simply wouldn’t do.
That being said, borrowers absolutely should factor these fees in and only borrow money when they expect to make a profit, even after paying back the loan. For someone whose business is on the verge of bankruptcy, who is desperate for money to operate for 1 more month in hopes of a miracle, they shouldn’t be borrowing from Kabbage or anyone else.
Experiences With Kabbage
NerdWallet has written up a review of Kabbage, as has Merchant Maverick. 3 years ago the New York Times posted about Kabbage, in an interesting story about a pet store owner who had been refused traditional financing and was able to get a loan from Kabbage in 7 minutes at 3 am in the morning.
Have you ever borrowed from Kabbage? What was your experience like?