Securing financing for your small business may soon get a touch easier. 

Alternative lender Kabbage scooped up $135 million in equity financing as part of its Series E funding round, the seven-year-old Atlanta company announced on Wednesday. The new equity brings its total raised to $240 million. 

"This capital is all being used to support additional growth of the platform, as opposed to bringing the platform to profitability," notes Milton Berlinski, co-founder and managing partner at Reverence Capital Partners. Reverence, which led the latest round, contributed more than half of the total funding. Though, Berlinski would not disclose an exact number.

While small businesses looking for a loan will surely benefit from the company having more funds at its disposal, the greater opportunity may well lie in Kabbage's own business model.

The alternative lending sector in general is heating up. For proof, look no further than giants OnDeck and Lending Club, which both hit the public market with great success last year, raising $200 million and $870 million, respectively. These companies use automated web platforms, which -- unlike traditional banks -- can underwrite potential clients on many factors beyond a FICO score. Apart from Kabbage, new private entrants include Fundbox and Credible, among others.

What's more, the company's latest funding round includes participation from three major global banks: ING, Santander InnoVentures, and Scotiabank. Their participation is notable, as more traditional institutions are recognizing the appeal of financial technology startups. 

What sets Kabbage apart, according to co-founder and COO, Kathryn Petralia, is the comparatively short payoff period length and size of its loans. Clients may choose to pay off their loans within two intervals, either six months or 12 months. The speed with which clients can apply for (and receive) financing is also a selling point. All said, the process takes about seven minutes, according to Petralia.

Kabbage can afford to give smaller sums of money because the company doesn't pay typical back-end costs--a broker's fee, for instance--thanks to its automated platform. The average line of credit is about $25,000, borrowed in regular installments of about $6,000. 

"At our very core, the focus has always been on automation and technology," Petralia says. "We ask the same exact questions that the banks ask, but we use data in a different way to get there faster."

When you sign up for Kabbage, it syncs with your company's data sources (a checking account, accounting software, or shipping partner, for instance) to evaluate risk, credit history, and to help determine the size of a loan. While that's sure to raise eyebrows from a cybersecurity perspective, Petralia insists that the company never has access to login credentials; borrowers must be physically logged in themselves to use Kabbage.

Kabbage serves a variety of corporate clients, from construction companies to nail salons to e-commerce retailers, and Petralia estimates that 70 percent of customers are brick-and-mortar shops.

Still, businesses aren't guaranteed a loan. An average client bills more than $500,000 in annual revenue and has been operational for more than one year. Clients tend to also have "prime" FICO scores above 640. Kabbage claims that it doesn't underwrite clients based on just the FICO score, but it does use the figure as a "benchmark."

Beyond that, clients need to be willing to fork over a hefty annual percentage rate--the average is 42 percent. There is no additional origination fee, however.

To diversify its revenues, Kabbage also licenses its software to third-party banks. And last September, it rolled out a beta consumer lending service--cleverly, dubbed 'Karrot'--since 30 percent of visitors to the site were already seeking individual loans.

Kabbage is originating $1 billion in loans each year, which definitely stacks up against the competition. OnDeck, for reference, originated about $1.2 billion in 2014. But some analysts are skeptical that Kabbage could continue to acquire (and retain) its customers over time. 

"It's a good point of entry for a lot of businesses," says Brian Riley, an executive advisor with the financial research provider CEB TowerGroup. "Sooner or later, businesses are going to hit a threshold where they can deal with a bank. The better I get as a business, the less likely I am to use [Kabbage]." 

He also flags that the 42 percent APR is "a very high number," relatively speaking. Banks, on average charge between 8 percent and 10 percent on small business loans.

Petralia remains confident in her company's technology. Not only was it "ahead of the game" in 2008, it will continue reaping the customers Kabbage needs moving forward.

Published on: Oct 14, 2015