Despite the stabilization of debt markets, banks are increasingly reluctant to lend to small businesses. Banks have less capital and less of an appetite to lend to small borrowers. Many of these businesses are as creditworthy as they were in 2008, but they just cannot meet the stringent conservative standards for present-day bank loans.
Below, we highlight three innovative firms that are lending to such businesses.
What makes Kabbage tick is that it does not rely completely on traditional credit models but rather uses real-time data while deciding whether to advance capital to a seller. Kabbage offers advances ranging from $500 to $40,000. Depending on the length of the loan and other factors, the company charges a 2% to 18% fee.
Customers from 41 states have taken advances through the Kabbage application. The rapid adoption rate suggests the strong need for funding among small businesses, and Kabbage says its platform seeks to fulfill this need. “Enabling access to funds from mobile devices is the next logical step in making it easier for small businesses to get instant access to capital” said Kabbage CEO Rob Frohwein. Kabbage has provided 60,000 capital advances since its inception, but it expects that number to rise above 100,000 in 2014 alone.
Kabbage was co-founded in 2009 by Robert Frohwein, co-founder and chairman, Marc Gorlin and Kathryn Petralia (COO). The company has received funding totaling $53.7 Mn through investors such as BlueRun Ventures, David Bonderman, Mohr Davidow Ventures, Warren Stephens, UPS Strategic Enterprise Fund, Jim McKelvey, Thomvest Ventures and SV Angel. Kabbage was named a Red Herring 100 North America Winner (recognizing top private companies) in May 2012.
Kabbage has advanced money to successful eBay merchants and Amazon.com sellers, and others who conduct business online, since 2011. Kabbage assesses the applicant’s riskiness by crunching his transaction history, social-media interactions and user feedback. Financing is offered within minutes of a positive assessment.
Kabbage’s new mobile application makes it easy for midsized-business owners to get access to capital. It takes customers just a minute to log in to their account, select the amount of cash required and send the funds in real time to their PayPal or bank account
To use the application, customers need to follow these steps:
o Sign up and create a Kabbage account, which is free.
o Select where they want to sell.
o Enter their payment-service details.
o Provide business and personal information.
The application is then submitted, after which the advance amount is determined immediately.
Another company operating in the same field is OnDeck Capital, founded in 2007. Its innovative technology platform helps small businesses gain access to capital. OnDeck’s application enables businesses to work on the go. OnDeck offers business loans up to $100,000 based on the performance of the business, rather than the personal credit history of the business owner. Through this model the company is connecting millions of small businesses with revenue under $3 Mn to institutions that want to lend money.
Fastpay, a technology-driven “antibank,” provides commercial loans against digital-advertising receivables or factoring.
Fastpay was founded in 2010. The company started out with an enterprise ABL (asset-based lending) product that leverages data to lend to media-focused SMBs. Since its launch, Fastpay has lent over $100 Mn in “working capital gap financing” to more than 100 publishers, ad-tech companies and other digital-media businesses. Fastpay has received funding totaling $35 Mn.
Some features of Fastpay’s platform:
- FastPay lends up to $5 Mn per borrower. This is based mainly on the strength of the payable vendor (ex. Coca-Cola).
- Proprietary algorithms assess risk and determine the credit-worthiness of each applicant within hours.
- Borrowers are required to pay a flat monthly fee of 1 to 2.5 percent, based on risk. Vendors remit payment to a bank “lockbox” that passes through the postfee balance to the business owner.
- When evaluating market opportunities, FastPay targets verticals in which large-brand advertisers advertisers are present, significant growth is occurring and there is a deficiency of growth capital.
The industry that Fastpay chose to start with is media, because that industry has three important qualities: scale, demand and opportunity. Regarding scale: Global advertising is a $495-Bn-dollar-a-year market, of which online advertising is a $100 Bn market set to double by 2017, according to a report from Magna. Of course, lending to a growing market is always easier than lending to a declining market.
Here’s a bonus fourth one, though it doesn't really operate in the space of lending to businesses ...
CommonBond is based on a model of “social lending.” Student borrowers gain access to lower-cost, fixed-rate loans provided by investors, who earn a competitive financial return. With the cost of borrowing increasing in the case of both fixed and variable interest rates, peer-to-peer lending platforms have risen to prominence recently. P2P lending platforms essentially look to crowd-source investment (from individuals, institutions, etc.) in people’s loans, connecting people who want to borrow money with those who want to invest in something with steady returns resulting in the elimination of the middleman, which in this case is the bank.
Founded in November 2011, CommonBond was the brainchild of David Klein and Michael Taormina, who were first-year students at the University of Pennsylvania's, Wharton School of Business. Fellow student Jessup Shean, who was in the final year of her dual JD-MBA degree, was their advisor. The main reason the company's founders came up with this idea was their frustration regarding the lack of affordable loan options to fund their education. Their business proposal was accepted by the highly selective Wharton Venture Initiation Program, which serves as a startup incubator.
After deciding to pilot their model at Wharton, CommonBond’s founders focused on fundraising during the summer of 2012. By November 2012, CommonBond had raised $3.5 Mn. It first lent money to 40 MBA students and recent Wharton graduates. Recently, CommonBond announced that it had raised $100 Mn for funding student loans from investors including Tribeca Venture Partners, Vikram Pandit (former CEO of Citibank), Tom Glocer (former CEO of Thomson Reuters), Tom Kalaris (former CEO of Barclays), Thomas Gloce and The Social+Capital Partnership.
There are two types of borrowers in this model: current students, including those seeking new loans, and graduates, including those paying off loans.
The money required for these categories of borrowers is being raised from alumni and a community of investors who realize the potential of students and recent graduates that other lending institutions do not recognize.