Why Kabbage Is Taking Its Show On The Road(s)

There is a old joke among small business owners about the best way to secure a loan from a bank: just go in and convince a loan officer that your business absolutely does not need one.  

Admittedly, it is a piece of humor not likely to elicit big laughs, especially among entrepreneurs who often find themselves on the losing end of that punchline, even when they are by most rational measures running successful outfits.

Outfits that needed to be served — and whose underservice created an opportunity for Kabbage, a Georgia-based FinTech firm that has spent the last several years carving out a niche in small and medium businesses lending.  

Though “niche” is probably not so much an apt description for Kabbage these days, considering that as of Aug. 11, it has extended $1 billion to businesses, and reported being “on track to extend another $1 billion in 2015.” By comparison, OnDeck — which raised $200 million in its IPO a little under a year ago — loaned about $1.2 billion out in 2014. OnDeck’s valuation at IPO was $1.3 billion, though these days that has shrank by about half to $626.39 million.  

Kabbage’s valuation, on the other hand, is looking very healthy — particularly after the announcement last week that the firm has just snapped up $135 million in Series E funding. The round was led by Reverence Capital Partners, with participation from ING, Santander InnoVentures and Scotiabank. Kabbage also saw its credit facility (the cash for fulfilling all those SMB loans) grow to $900 million. This latest round of funding also knocks Kabbage’s valuation to a rumored $1 billion, meaning odds are good that Kabbage has joined the unicorn club — albeit on the down low.

Kabbage’s standard business partner, it should be noted, can be almost any kind of business, but they must be a somewhat successful business. The average loan on the platform is about $25,000, paid out usually in $5K-$6K installments — and the business that receives them almost always has a prime FICO score, revenue of over $500K, and have been in business for over a year.  

“Kabbage has 100,000 customers, but there are 20 million small businesses out there in need, because the regulatory environment has left the market unpalatable for banks,” Kabbage’s Chief Marketing Officer Victoria Treyger told PYMNTS.

Some, however, have questioned Kabbage’s ability to capture those other 20 million or so opportunities, or even hold onto their present client list for future loans. Kabbage is fast and very efficient, Brian Riley, an executive advisor with the financial research provider CEB TowerGroup told INC., but with APRs that can top out at as much as 42 percent, they are still a rather expensive way to gain access to capital — particularly when banks loans are topping out at 10 percent.

“It’s a good point of entry for a lot of businesses,” Riley said. “Sooner or later, businesses are going to hit a threshold where they can deal with a bank. The better [they] get as a business, the less likely [they] are to use [Kabbage].”

Kabbage has three responses to this critique.  

The first was that Kabbage’s total service package — including the ability to modify loans in real time to reflect business conditions on the ground — actually did a lot to preserve loyalty (though she declined to disclose any numbers).

The second was the size of the underserved market.

“With 20 million underserved small businesses, I think there is probably a lot of market share to go around before we are seriously concerned that we won’t have enough business,” Treyger said.

The third was that though lending is an important part of what Kabbage does and of the services it offers for small businesses, its core product is really built around data science and using information more efficiently to reduce risk. The tech that supports that its lending business is something that Kabbage has white-labeled and aggressively marketed to banking partners who they are much more interested in collaborating with than trying to compete with head-to-head.

Which is what makes the latest $135 million round so interesting for Kabbage, as it sees the firm taking funds from a slew of international banks including ING, Santander (Spain), Scotiabank (Canada), Yuan Capital (China) and Recruit Strategic Partners (Japan). Kabbage, it seems, is going global, but instead of going it alone it is doing it on the backs of some already very established partners

“Without this investment, we would have still been able to expand our investments, but more slowly. This pushes our growth into hyperdrive, to be able to invest super quickly in markets,” noted Kabbage COO Kathryn Petralia.

“Every market has a different need for a product. In some cases it’s a line of credit, or a credit card, or what have you, so the ability to deliver any type of product to any type of customer is where we need to be. We can do a lot of that, but not every market conforms the product to meet our exact needs. We’re developing to create a flexibility that is not only able to serve markets but execute very quickly,” she further explained.

Kabbage’s international expansion in Europe, Latin America and Asia will not look exactly like its U.S. counterpart, where Kabbage functions as a direct lender to SMBs. Instead, it will pursue a relationship similar to Kabbage’s licensing arrangement with Australia’s Kikka Capital.

But Kabbage will be expanding its direct lending in the U.S., particularly with a large expansion of it personal lending platform, Karrot.   

“We’re at the precipice of a large expansion of Karrot,” CEO Rob Frohwein noted in an interview with TechCrunch. “Today it represents 10 percent of our business and will be between 25 percent and 30 percent of our business by next year.”

Coming into the final stretch, 2015 has been a good year for Kabbage, and clearly they are expecting big things for next year. But having big expectations — on their own part, or on the part of their investors — is nothing new for alt lending, particularly alt lending for small businesses. Living up to those expectations is challenging, as OnDeck can attest. But Kabbage does have an unusual willingness for playing well with others. Only time will tell if that can make the difference when it comes time to actually deliver.