Analysis Featured

Taking Over Small Business Lending From the Banks

kabbage online smb lending

Five years ago, 95% of Kabbage’s loans went to eBay businesses. Today, 90% of the company’s loans are extended to brick-and-mortar businesses representing a seismic shift in how the direct lender has transformed since its founding in 2009. Co-founder and CEO Rob Frohwein got the idea for Kabbage from his own knowledge of eBay. He wanted to give third parties access to business financing and developed a platform for underwriting small business loans to those types of businesses.

Headquartered in Atlanta, Frohwein recruited Kathryn Petralia, who serves as head of operations, and Marc Gorlin, no longer with the company, as co-founders. Despite being a balance sheet lender, Kabbage does have its partners. Victory Park Capital provides most of the funding for its debt while Mohr Davidow, ING, and other investors cover its equity funding.

On August 3rd of this year, Kabbage completed a Series F funding round of $250 million led by the SoftBank Group. That amount brought their total raised through the six rounds to $488,650,000. The company’s A series round in January 2011 raised a modest $6.65 million, with BlueRun serving as the lead investor. Their funding has progressed steadily. Series F almost doubled Series E, which raised $135 million in October 2015. Reverence Capital led that round.

A founding member of the Innovative Lending Platform Association (ILPA), Kabbage is an online lender motivated by unique and interesting data and is one of the largest U.S.-based nonbank lenders to small businesses.

Partnership Highlights

Kabbage has enjoyed a stellar history of partnerships, almost right from the beginning. Its first loans were issued in May 2011 based on debt funding from Victory Park Capital. In February the next year, the company entered an agreement with United Parcel Service allowing small businesses to share their shipping histories with Kabbage. Three years later, in March, they partnered with MasterCard to make Kabbage’s data and technology platform, as well as access to working capital, available to MasterCard’s small business partners. Then, in April 2016, the small business lender began servicing Santander UK’s SME customers. A couple of months later, Kabbage announced a partnership with Scotiabank to enable businesses to borrow up to C$100,000 (US$78,290) online in as little as seven minutes. Most recently, in August 2017, the firm received the previously mentioned $250 million investment from SoftBank Group, capital that Frohwein said will help the company expand in the U.S.; launch analytics tools to provide loans for specific verticals; branch into new markets, like Asia; and explore acquisitions to add new products to its inventory.

Petralia shared how the company might also use the SoftBank investment to expand existing technology, such as the Smart Box Disclosure and Loan Comparison tool. Released in 2016, in partnership with OnDeck and CAN Capital, this tool helps small businesses better assess and compare finance options. There was also industry speculation earlier this year that the SoftBank capital might provide Kabbage with the firepower for a potential takeover of OnDeck Capital, which went public in 2014 but has since struggled with growing losses, rising defaults, and higher funding costs. Both Kabbage and OnDeck have been mum about those rumors.

On October 24, 2017, Kabbage and ING announced a partnership to fund small businesses in France and Italy, an expansion of their 2015 partnership in which they did the same in Spain.

Success and Accolades

As the company has expanded its reach around the world, so has its pedigree. In 2012, they were named to Red Herring’s list of the Top 100 private North American companies. In 2013, they made the Fast Company’s Top Ten Most Innovative Companies in Finance list. Forbes added them to the Top 100 Most Promising Companies list in 2014 and 2015. In 2016, CNBC put them on the Annual Disruptor 50 list of the most forward-thinking and ambitious companies revolutionizing industries and markets worldwide. Then, three years in a row (2015, 2016, and 2017), they were included in the Inc. 500 list of the country’s fastest growing private companies.

Still, partnerships and accolades do not necessarily spell success. When banks pulled out of SME lending in the wake of the 2008-09 financial crisis, Kabbage was one of the companies that stepped forward to fill the void and meet the need. To date, they’ve lent $3.5 billion to more than 115,000 small businesses. In fact, they’ve funded $3 million a day, on average.

The Future of Kabbage and Small Business Lending

Petralia says the future for Kabbage is more direct lending underscored by a marked increase in platform partnerships. The company is actively evaluating products to engage small businesses and their direct lending needs.

Further, Petralia promises that, along with companies like PayPal and Square, Kabbage is poised to help lead the industry into a future with more focus on customer experience and a greater focus on the relationship with the borrower. Where traditional financial companies worked with brokers, fintech lenders continue to focus on the relationship with borrowers.

Kabbage is also carving its niche in the future by tapping into the ever-growing diversity in the U.S. population. Petralia is pleased to confirm that the company is reaching the plateaus and celebrating the accomplishments it does on the strength of a leadership structure and work force that boasts a greater mix of women. On average, women account for 26% of the work force in fintech companies, but that mix is as high as 35% at Kabbage, which also boasts four women on its leadership team.

Furthering the company’s ties to diversity, Petralia says the company also exceeds the financial services industry by double in terms of women and minorities customers, as women and minorities are more likely to run small businesses. As the company’s customer application is blind, no concrete data exists on this.

Still, it looks as if Kabbage is poised to continue to spearhead the growth of the online lending industry, and whether Mr. Frohwein envisioned his company filling that void left by the banks or not doesn’t matter. What matters is that Kabbage is on the cutting edge of new direction in small business lending, and it’s paving a path for others to follow.

Authors:

Written by Paul Keenan and Allen Taylor

Allen Taylor
Allen Taylor

About the author

Allen Taylor

Add Comment

Click here to post a comment

Your email address will not be published. Required fields are marked *

Testimonials

default image

"Your daily letter is great!" , Ram , Founder and CEO, PeerIQ

default image

"Hi George - just want to tell you that you are doing a great work with Lending Times;-) Brgds, Kasper" , Kasper, Partner and Co-founder at Dansk Faktura Børs A/S

default image

"I've been following your newsletter for some time now and have been very impressed with the content." Charlie,Co-Founder | Bolstr

default image

"Hey George, I must say I really enjoy your site. It has inspired me to do some changes at our platform and we are the biggest consumer lender in Sweden." , Ludwig, CEO @ Savelend Sweden AB

default image

"Your daily email is very useful. It gives quick update on what's going in the market. Thank you very much for all that info." Yann Murciano, Head of Base Metals Trading at Morgan Stanley

Our daily p2p news digest

Daily News Summary Digest Sent Daily To Your Inbox