Why Banks are Missing the Point
The Great Recession wasn't only marked by economic desolation, it saw the rise of alternative lenders for you and your business.
As banks stopped extending credit, these lenders, many of them small businesses themselves, saw an opportunity and jumped in. And they might have been critical to entrepreneurs like you.
One of these, Kabbage, an online financing platform, just announced full-year numbers for 2013, and in addition to showing triple-digit growth, the numbers tell a story about your demand for financing: You need lots of it.
Kabbage, based in Atlanta, is a small business itself with 85 employees. Launched in 2011, it was financed by institutional investors who thought the plan to provide quick operating cash to needy small businesses was a timely idea.
Fast-forward two years: Kabbage has about 240,000 customer accounts, an increase of 150 percent over 2012, and it's advanced more than $123 million to these entrepreneurs, a 133 percent increase for the same period. Since launch, it's extended more than $200 million in financing for small business operations.
"Banks have not kept up with technology, and they continue to use outdated ways to evaluate whether to lend," says Victoria Treyger, chief marketing officer.
Kabbage uses an online application it claims takes less than 10 minutes to complete, and if you're approved, you can get your money the same day if you have a PayPal account, or within 48 hours if you decide to use your bank account.
Kabbage doesn't call its style of financing "loans," because the financing is structured like a line of credit, typically ranging from $500 to $50,000. (Starting in February, the upward limit will jump to $100,000, Treyger says.) You can continue to borrow against it as you pay it off.
And rather than relying solely on the FICO score to make its judgements, Kabbage has developed its own metrics, which also take into account cash flow, shipping history if you are an online retailer, payment processing history, as well as your business' checking account data.
The fee for the capital line works out to about 12 percent on average for a six-month advance, which is about four percentage points higher than the average bank loan.
"We are able to have this more performance-based real-time view of a small business when we give them capital," Treyger says.
Kabbage doesn't work with small businesses that lack a financial track record. It requires at least six months of data relating to your business, which is still much better than the multi-year financial information you'll have to have ready for a bank loan.
Nearly half of small businesses that needed financing didn't get it, according to capital access survey conducted by the National Small Business Association in 2012, its most recent. The inability to get financing caused a third of businesses to lay off employees, while 20 percent reduced employee benefits, and 17 percent were unable to meet demand.
"When you have 28 million small businesses and half can't get funding, those are big numbers," Treyger says.