Editor’s Note: This story first appeared on Small Business Nation.
Welcome back to our Small Business Spotlight series, where we profile innovative small businesses and startups across the country and identify lessons from their operations, strategies, and growth.
Our newest profile takes a look at Kabbage, an Atlanta-based financial technology company that launched in 2009. Kabbage offers a fully automated financing platform that allows small businesses and online merchants to apply for short-term loans. While traditional lenders rely on income statements and tax records to assess creditworthiness, Kabbage uses data from online businesses and financial service accounts. Borrowing decisions are determined within minutes of applying and funds are available on the spot.
Kabbage began making its first loans to online merchants in 2011 and extended its lending to all small businesses—including brick-and-mortar operations—in February 2014. The company was named one of Forbes’ Most Promising Companies for the second year in a row in 2015. To date, Kabbage has provided nearly $2 billion in loans to ensure small businesses have the support they need to grow.
We spoke with Kathryn Petralia, the COO and co-founder of Kabbage, about the financial challenges facing small businesses and startups in 2016. Kathryn has two decades of experience working with startups and established companies on e-commerce issues and has emerged as one of the most influential thinkers in financial tech.
Why do small businesses have such a hard time getting access to credit?
Surprisingly, the majority of small and medium-sized business (SMB) borrowers seek loans of $100,000 or less to fund their business, but traditional banks don’t often support customers in need of this smaller loan size. Additionally, there are many different types of lending options which makes it extremely difficult to compare options and select the provider that is the best for their business.
When and why do small businesses or startups borrow? What types of purchases or investments necessitate short-term micro-loans?
The reason a small business looks for alternative lending options to grow their business varies by business and business owner. At Kabbage, all of our customers have been in business for more than a year and they use the line of credit for business growth, including inventory investment, marketing expenses, and other business expansion purposes.
What is your approval rate for small businesses?
For businesses generating at least $5,000 per month in verified revenue our approval rate is around 80 percent, and we have more than 75,000 customers today.
You started off loaning exclusively to online businesses but expanded to brick-and-mortar businesses in 2014. How do these businesses’ short-term financial needs differ from online-only enterprises or startups?
Kabbage’s business customers are distinguished from a traditional startup is a couple of ways: first, applicants must have been in business for more than a year. The typical customer profile is a business seeking a line of credit to grow at their own pace—expanding inventory, marketing, and more—versus a startup that is typically seeking funds to invest in equipment, real estate, technology or infrastructure before they have generated revenue.
Kabbage’s line of credit is specifically tailored to SMBs—which include both online and traditional businesses—to support investments in growth. More than 75,000 businesses have taken advantage of the working capital provided by Kabbage, and all businesses move through the qualification process in the same way.
Social media activity is one of the factors you use in assessing creditworthiness. What does social activity tell you about a business?
On average, a small business owner has up to five social media profiles, each connecting to a different target audience that will likely yield a positive impact on business growth over the long-term. We encourage all applicants to securely connect these accounts as key data sources, in addition to other business accounts such as checking, payment processing, accounting, and even shipping accounts.
What do your internal data and interactions with small businesses and entrepreneurs tell you about the state of small business in 2016?
There are nearly 28 million SMBs in the U.S. and nearly 50 percent of them can’t access the funds they need through traditional lending. We also know that traditional lending solutions struggle to serve small businesses, particularly those who seek loans of $250,000 or less. Improving the customer experience is one of the reasons we founded Kabbage, and it’s our mission to put the power of growth back in the hands of the small business by giving them convenient access to working capital.
Why are financial technology-related startups having such a moment right now? And how will fintech disrupt financial services in the years ahead?
We view our role in the financial technology space as being a trusted partner and advocate for small business customers, as well as for banks who want to transform their SMB customer experience through Kabbage’s unique technology and data platform. Kabbage is to fintech what Amazon is to e-commerce: Amazon powers e-commerce for thousands of merchants with exceptional customer service just as Kabbage powers lending for SMBs across all industries, including construction, retail, and professional services.
In the years ahead, you’ll continue to see disruption in our space, with a focus on improving the customer experience for all financial products. This will range from more seamless, flexible options for mobile banking, to alternative lending, to more automated money-management tools. At Kabbage, we will continue to leverage our easy-to-use platform to expand our reach to more customers, while providing faster and more precise funding options to meet customers’ needs.
What challenges has Kabbage faced as it has grown and expanded? Have regulatory issues been an obstacle?
We are committed to transparency and ensuring customers have access to fair and efficient financing to grow their businesses. We are also aware that there has been significant dialogue regarding transparency in our space and we’re working hard with our industry peers and policy makers to create clear, concise verbiage and standardized disclosures for borrowers. In fact, Kabbage, along with other financial technology innovators, recently announced a joint initiative to advance small business online lending education and transparency. We are excited to launch this initiative intended to tackled key policy priorities and present a tangible solution for business owners to better understand and compare their loan options.
What are the benefits of operating from Atlanta instead of, say, Silicon Valley? Why is Atlanta such a good fit for Kabbage and your employees?
Atlanta has been an incredibly positive place to start and grow a technology company. Many aren’t aware of this, but 70 percent or more of all electronic payment transactions in the U.S. flow through Atlanta-based businesses, which has made Atlanta a fintech hub. This has made hiring software engineers, product specialists and filling many other roles much easier, with significantly less competition than we would face in the bay area. The cost of living in Atlanta is lower, the quality of life is fantastic and the culture is rich and diverse.
Having said that, it certainly is difficult for startups to raise early stage funding in Atlanta. The venture community is very small, and the lack of access to equity capital drives down valuations and leaves entrepreneurs vulnerable to unattractive terms. In recent years, organizations like Atlanta Tech Village have provided support and funding for budding tech entrepreneurs, so I am hopeful the momentum will continue to build.
For more small business insights and profiles, check out the Small Business Nation blog.