Kabbage Hits Purple Patch, IPO Could Someday Sprout

by Shelton on December 9th, 2014

filed under Online Business Credit

Online business-credit provider Kabbage Inc. said it has increased the pace of its cash funding to small businesses to over $1 million a day, according to Chief Executive and Founder Rob Frohwein.

The Atlanta-based startup, founded in 2008, last year provided $200 million in cash credit lines to small businesses, including Amazon, eBay and Etsy vendors, he said. Kabbage uses metrics including social media such as Yelp ratings and bank or PayPal account activity to determine how much and at what rate to offer financing.

Mr. Frohwein said that Kabbage will provide “hundreds of millions” in new credit lines this year, and has set a goal of $1 billion next year.

If met, that would put it in the ballpark of other fast-growing online financers including Lending Club, which makes personal loans, and rival business financer OnDeck Capital. OnDeck has provided $900 million since 2007, according to its website, while Lending Club has exceeded $3 billion since 2007, the company said.

The practice of using social media and other web metrics in lending is still new, and some consumer advocates say there are privacy and other concerns, the Journal has reported. (Read a discussion of some users experiences here, at website CreditKarma.com.)

Alternative financing for consumers and small businesses, which became more scarce after the financial crisis as banks and credit card providers dialed back, has been a theme in the IPO market recently.

Santander Consumer USA Holdings Inc., which makes subprime auto loans and is moving into consumer loans, went public in January. Springleaf Holdings Inc., which has branches that make subprime personal loans, went public in October. Both have seen their shares rise. Lending Club has said it is preparing for an IPO this year.

Mr. Frohwein said an IPO was an option for Kabbage too, but not until at least 2015. “We’re not planning on filing for an IPO this year. Right now we’re focused on building ,” he said.

“I think it’s a situation where we’ve got to figure out what makes sense for the company. [An IPO is] a possibility, but it’s not something we’re planning on doing over the next 10 or 11 months,” he added. “We will definitely raise more money as it’s needed to expand. … There’s certainly an appetite in the market for companies who are looking to do this.”

Kabbage launched its automated online platform in 2011. It gets the money to fund the credit lines from equity investors and its own debt.

It has raised $56 million in equity capital so far, according to Mr. Frohwein. It was initially from angel investors, who included David Bonderman, co-founder of private-equity firm TPG, and Warren Stephens, chief executive of Little Rock, Ark.-based investment bank Stephens Inc.

Venture-capital firms BlueRun Ventures, an early backer of PayPal, and Mohr Davidow Ventures have also invested, and Chicago-based investment firm Victory Park Capital has lent Kabbage money.

Kabbage also secured an infusion from United Parcel Service Inc., with which it works to offer funding to non-online small businesses, said Mr. Frohwein. It also partners with small business software maker Intuit Inc., he said.

What Kabbage provides are not loans, they are “merchant cash advances. Kabbage is not an FDIC-insured bank, and it is regulated by state authorities. Mr. Frohwein said that Kabbage is exploring partnering with a bank to potentially provide traditional loans, which can be for larger amounts and can be re-sold to other investors.

The typical credit line is about $10,000 to $20,000, said Mr. Frohwein, often withdrawn in small chunks. Businesses pay more the longer the credit is outstanding, with rates ranging from 2% to 20%, he said.

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