Online Lending Sector Heats Up

According to PayNet Small Business Lending Index, the volume of financing to small businesses in the country grew to 121.6 in December last year from 114.6 in November. This was the highest growth recorded by the market since March 2007. Like other retail customers, today small businesses also have the option of securing funding from organizations besides traditional banks. The need for alternate financial organizations has also increased since the economic recession hit the country. After the recession, most banks cut down the approvals of small business loan requests. In October 2012, banks had approved 14.8% of small-business loan requests in comparison with 46% before the economic downturn.

Kabbage’s Offerings
One such company offering working capital loans to small online businesses is Atlanta-based Kabbage. Kabbage was founded in 2008 by Kathryn Petralia, Rob Frohweins, and Marc Gorlin whom I had interviewed a few years ago. They pioneered the financial services data and technology platform to provide funding to small businesses almost instantly. Unlike the traditional banks and moneylenders which rely on detailed financial business models, credit scores, and paperwork, Kabbage takes into account data generated through business activity including seller channels, social media, and shipping data to analyze business performance. Kabbage does not call itself a lender, but a provider of merchant cash and working capital advances.

Last year, Kabbage also entered into a partnership with Intuit to use QuickBooks data to approve small business loans. The more than 4 million small businesses which use QuickBooks can now get access to Kabbage loans by selling a part of their future credit card receivables toward these loans.

Based on these parameters, businesses can secure approved credit lines ranging from $500 to $100,000 within 7 minutes of the application process. Businesses can then borrow any amount once a day and pay interest on these borrowed amounts at borrowing fees that ranges from 1%-13.5% for the first 2 months followed by 1% for the rest of the period. Loans are instantly available with the organization’s accounts such as PayPal accounts for periods up to 6 months with no fees for early repayment. Kabbage has also adopted the mobile world and now offers iOS- and Android-based apps that lets users borrow funds on the go.

Since its launch, Kabbage has provided funding of over $200 million to more than 100,000 small businesses, including several merchants on Amazon, eBay, and Etsy. Kabbage is on track to deliver $500 million in loans by the end of this year and has set itself a target of providing $1 billion in loans by next year. Kabbage uses their own funds to provide loans to these businesses.

Kabbage’s detailed financials are not known, but market reports suggest that the company was operating at an annual revenue rate of $17 million last year, recording growth of 140% over the year. Kabbage has been funding operations through venture funds and debts. They have raised $465.4 million in funds with nearly $362 million from Guggenheim Securities, Thomvest Ventures, Victory Park Capital, and Western Technology Investment. Their venture funding has come from Mohr Davidow Ventures, BlueRun Ventures, Thomvest Ventures, UPS Strategic Enterprise Fund, Lumia Capital, The TCW Group, SoftBank Capital, David Bonderman, Warren Stephens, SV Angel, and Jim McKelvey. Their latest round of funding was held in May this year when they raised $50 million in a round led by SoftBank Capital at an undisclosed valuation. In April this year, Kabbage had also raised $270 million in debt from undisclosed investors.

The small business funding market has become one with intense competition from such non traditional institutions. Besides Kabbage, there are the likes of OnDeck Capital which not only caters to online, but also brick-and-mortar businesses to provide them lines of credit. OnDeck also has big coffers and has raised $400 million in debt and equity so far with $77 million raised earlier this year in a round led by Tiger Global Management. Additional vendors in the space include PayPal’s Working Capital advances offering that helps online merchants who collect using PayPal to tide through working capital requirements. And, joining the club are players like LendingClub which used to focus on retail loans and are now also looking at expanding their offerings to smaller business.