Kabbage: A Fintech Leader for Small Business Lending

Kabbage logo

Kabbage is on a roll. They are one of the leading Fintech companies focused on loans for SMBs – Small and Medium size Businesses. They recently raised $250 million in venture capital, after accessing $500 million in March 2017 for lending to businesses.

The money rolling in to Kabbage means there will be a lot more rolling out to their business customers. At the time of the financing (August 3, 2017), they claimed more than 100,000 customers had received a cumulative of $3.5 billion in loans since their founding in 2009.

Should you consider Kabbage for your own business credit needs? At a minimum it’s not a place for startup financing. Your business:

  • Needs to be at least one year old
  • Needs revenue of $50,000 annually or
  • Revenue of $4,200/month for the last three months.

If you fit that minimum, our initial take is that Kabbage could make sense for businesses that:

  • Cannot receive any or enough line of credit financing from conventional banks, or you need it almost immediately
  • Need short term financing – 6 months or less
  • Have strong cash flow especially in the two months following the receipt of financing cash such that they are sure the loan can be repaid on time
  • Have a high return on investment for their use of the borrowed cash.

The rest of this post provides some further insight.

Consuming Kabbage

Kabbage markets its business debt product as a line of credit, but there are some important differences between what they offer, and what conventional banks call a line of credit.

Those conventional debt products are somewhat similar to a credit card in that they “revolve.” You have a maximum total credit line, and you can access it (up to the limit) as needed. There are monthly payments based on the total credit used at each billing date, and interest charges are based on the prevailing interest rate and the total credit used. There may also be other fees as well such as (typically) modest annual fees, cash advance fees, and late payment fees.

When you draw down a conventional line of credit, that draw is all part of the same debt product. Not so with Kabbage. Each draw – that is, each time you request cash transferred into your account – is considered by them to be a new loan. From their web site:

“Each loan is an independent 6 or 12-month installment loan with its own loan agreement and fees.”

While the company’s web site says it offers both 6- and 12-month loans, its fee schedule strongly encourages 6-month loans (see below for more on that point). Its web site also makes it clear that prepayment is something they like. There are no prepayment fees, and some of its tools allow businesses to see how much they would save in fees if they paid off their loan in, say, 4 months instead of 6 months.

Kabbage analysts note that:

“The company has focused mainly on loans with a six-month payback up to now, and it claims to have a loss rate — the amount of money on each dollar that does not get paid back — lower than the rest of the industry, including institutional banks (it’s not publicly disclosing that loss rate).”

Kabbage Fees Are Different

One of the distinctive features of the Kabbage “line of credit” is that interest and other fees are blended into a single, front end loaded monthly fee structure.

Fees are higher at the beginning of the loan, and then sit at 1% of the original loan per month through the end of the loan. The fee range for the beginning of the loan ranges from 1.5%, they say, up to 10%. Those higher fees last for two months if you are taking out a 6 month loan, and a full six months of higher fees if you are taking out a 12 month loan.

And the early, higher monthly fee is considerably lower if you are taking out a 6 month versus 12 month loan. Kabbage really likes shorter term paybacks.

The following example is taken from their handy loan calculator. This online tool is a very simple way to see exactly what a Kabbage loan will cost – if you pay on time! The table below shows the results for a $20,000 loan at the “5% fee rate.” The initial two monthly fees are $600/month for a 6 month loan. If you are paying that loan off over 12 months, the initial higher monthly fees are $1,000/month for the first 6 months of the loan. In both cases (6 and 12 month loans) the monthly fee comes down to $200/month for the final months.

 

  Kabbage $20,000 loan – 5% fee
  12 month loan 6 month loan
Month Principal Fee Payment Principal Fee Payment
1 $1,667 $1,000 $2,667 $3,333 $600 $3,933
2 $1,667 $1,000 $2,667 $3,333 $600 $3,933
3 $1,667 $1,000 $2,667 $3,333 $200 $3,533
4 $1,667 $1,000 $2,667 $3,333 $200 $3,533
5 $1,667 $1,000 $2,667 $3,333 $200 $3,533
6 $1,667 $1,000 $2,667 $3,333 $200 $3,533
7 $1,667 $   200 $1,867
8 $1,667 $   200 $1,867
9 $1,667 $   200 $1,867
10 $1,667 $   200 $1,867
11 $1,667 $   200 $1,867
12 $1,667 $   200 $1,867
TOTAL $20,000 $7,200 $27,200 $20,000 $2,000 $22,000

Clearly the 6 month loan is much cheaper!

Kabbage Subtleties

If you start to use Kabbage like a line of credit and borrow more before you’ve paid everything back, it can start to get a bit tricky. It also requires attention to precise timing of additional payments or new loan requests if you are managing a tight cash flow.

All Loan Payments Once A Month

This feature is typical for credit cards and lines of credit, so it’s not difficult to manage.

First Fee Due First Billing Month

Here’s where timing may be important if you take another loan before previous loans are paid off. Let’s say Kabbage has been billing you on the 10th of the month and payments are due on the 30th of the month for a $10,000 six month loan. In month four your customers are slowing payment, so you need to draw another $6,000. If you take your $6,000 on the 9th of the month, your first big fee will be due on that $6,000 on the 30th. So wait until the 11th to draw the cash!

Early Repayment Timing

Imagine you have a Kabbage loan out, and in month three a customer pays you earlier than expected on the 3rd of the month. Great! You want to pay down a bit more of your balance. If billing is on the 10th of the month, make sure you wait until after monthly billing to send extra cash against your loan. From their FAQ:

“If you make a payment in the 10 days between your last payment due date and your next statement (billing) date, the payment won’t lower your next minimum monthly payment. Any payment that is more than the current monthly minimum due will be applied in the following order: First to any unbilled Late Fees, Returned Payment Fees or Debit Card Express Fees, to the extent applicable, then to your remaining principal balances in order, ordinarily beginning with the oldest loan first, then the second oldest loan and so on.”

Credit Given, Adjusted, Removed

A footnote on their home page says:

“Credit lines are subject to periodic review and change, including line reductions, line increases, or line eliminations. This is not a revolving account. Individual requests for capital are separate installment loans.”

As a Fintech company Kabbage has developed a considerable amount of technology to understand your exact financial position, and to track that over time. For example, they strongly encourage companies to connect their accounting systems, Amazon accounts and Paypal accounts upfront to ensure businesses get the maximum credit they deserve.

The downside is that if your business suddenly drops off and puts you into a financial crunch, Kabbage is likely to know about it. This is not a source of business emergency cash.

Personal Guarantee Required

One more important note. While the loans are unsecured by business assets, the company does require a personal guarantee from business owners.

Konclusion (?)

None of this is out of line, even if the effective interest rates are higher than some other types of debt. Clearly, businesses are finding Kabbage to be useful. Small businesses in particular are struggling to get conventional bank loans and lines of credit. Kabbage is filling a hole in the market.

You just need to make sure it’s right for your business. Don’t get pickled!

 

Don Gooding

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