Posted on Monday, Nov 16th 2015
Loan approvals from traditional banks to small businesses had taken a huge hit after the recession and this has led to the rise of alternative lending services and online lending platforms. According to a research study by TradeUp, more than $8.6 billion or 2.8% of small business loans in 2014 were from online lending platforms. Kabbage is one such online lending platform that has recently made its way to the Billion Dollar Unicorn Club .
Atlanta-based 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 that 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.
Based on these parameters, businesses can secure approved credit lines ranging from $2000 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 range 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 penalty for early repayment. Kabbage also offers iOS- and Android-based apps that lets users borrow funds on the go.
Since it started lending in 2011, Kabbage has come a long way from lending $7 million a year to $7 million a day. It recently expanded its credit facility or its funds for loans to $900 million with the help of a Series E funding of $135 million, led by Reverence Capital Partners, a regular investor in finance businesses and with participation from international banks like ING, Santander InnoVentures, and Scotiabank. It has recently announced a product in collaboration with ING to deliver instant capital to small businesses in Spain.
Kabbage’s detailed financials are not known, but according to this TechCrunch article, the company is on track for revenue of $100 million in 2015. It had an annual revenue run rate of $17 million in 2013. Kabbage uses its own funds to provide loans to small businesses and it has been funding operations through venture funds and debts. They have so far raised $600.4 million in funds from Thomvest Ventures, Mohr Davidow Ventures, BlueRun Ventures, UPS Strategic Enterprise Fund, Lumia Capital, The TCW Group, SoftBank Capital, David Bonderman, Warren Stephens, SV Angel, Jim McKelvey, ING Group, Recruit Strategic Partners, Reverence Capital Partners, and Santander Innoventures. Their latest round of funding was held in October this year when they raised $135 million at a reported valuation of $1 billion. Competitors SoFi and UK’s Funding Circle were also valued at over $1 billion in recent funding rounds.
Soon after the IPOs of lending firms LendingClub (NYSE:LC) and On Deck Capital (NYSE: ONDK), the beginning of the year 2015 saw increased investments and increased competition in lending services targeted at SMEs. PayPal, Google, and GoldmanSachs are some of the big names drawn to the small business lending segment. Another threat for the industry is increasing SME lending application approval rates from traditional banks.
However, the sector is not looking so hot now with the shares of LendingClub and On Deck Capital plummeting much below their IPO levels. LendingClub’s revenue was $213.4 million in 2014, and its IPO valuation was more than $10 billion, whereas it is now worth less than $5 billion. On Deck Capital is worth about $700 million, about one-fourth of its IPO valuation. Analysts say that high interest rates and fees as well as the uncertainty of impending federal regulation may add to their woes.
More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.
This segment is a part in the series : Billion Dollar Unicorns
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