Small business cash advance provider Kabbage Inc. screens its merchant applicants by applying a sophisticated algorithm to the broadest possible spectrum of relevant business data, according to company Chairman and co-founder Marc Gorlin.
Such an approach is antithetical to the narrow, often exclusively credit score-based, screening processes employed by banks and other traditional lenders, Gorlin said. Yet, for many small merchants seeking extra capital in an era of increasing tightfistedness, the availability of a more flexible capitalization option can mean the difference between small gains and large profits, growth and stagnation, or survival and collapse.
"We use an automated system that takes into account persistent connections to alternative data that traditional financial institutions just aren't looking at," Gorlin said. "The reason financial institutions have a hard time underwriting small businesses is they don't understand them and have to rely on credit score. If your FICO score's under 700, they're not going to give you any money. But looking at credit score alone doesn't really tell you the whole story. Someone who doesn't have a really high credit score can still be a great prospect if they have a solid business plan."
Kabbage's online algorithm is distinguished by its use of what Gorlin referred to as "data connections and data context." That is, the algorithm considers a varied array of information submitted by the applicant, conflating the different data to generate a cohesive, textured picture of a business's monetary outlook and profit potential. Considering "data context" means gathering any and all obtainable information that's indicative of a business's financial well-being and potential, and piecing that data together to yield the clearest and most complete picture possible, according to Gorlin.
"Credit scores tell you something, but not nearly everything," he said. "With data context, you can see a lot more clearly what's going on. ... We are able to virtually walk the wooden floors, see products on the shelves, see what customers say, and do all of it electronically." Kabbage's screening process considers, among other things, a merchant's credit score, type of business, what the merchant sells, revenue levels, chargeback history, shipping and inventory information, accounting data, merchant processing information and social networking activity.
Gorlin said the company's algorithm contextualizes these different pieces by identifying patterns of interconnectedness, lending more insight into each discreet body of data than it would normally provide by itself. "We draw lines between different types of data and use it to assess the business," he said.
For example, infrequent restocking of inventory, slow shipping times and low social media activity may indicate poor business practices that override sterling credit. On the other hand, timeliness with shipping, frequent online business activity and sleek marketing techniques may reveal a good advance candidate despite a mediocre credit rating.
The following exemplify the types of questions Kabbage asks: What do you sell? How much of it do you sell? How much revenue are you bringing in and what are you spending? How much are you shipping and how quickly?
Is it taking you longer to ship things than it used to, and does that indicate a cash flow issue? How's your inventory? Are your books up to speed? Do you have a social media presence, and are you engaging with customers on social media? "All of these things converge to create a good sense of how well this business is operating," Gorlin said.
Gorlin has observed that clients who have added either Facebook or Twitter to their Kabbage accounts are 20 percent less likely to be delinquent on their payments. He added that how a business leverages other digital business tools - platforms like eBay, Amazon, PayPal, Google Analytics and QuickBooks - can also be a key indicator of a merchant's acumen and work ethic.
There is no upfront charge or origination fee for applying for and receiving an advance from Kabbage, Gorlin noted. The process is Internet-based and automated, with merchants importing and entering relevant business information on an online application.
Merchants who apply for advances can be approved within seven minutes, Gorlin said. Money is then transferred via PayPal, arriving in a merchant's PayPal account instantly. "From the time you start typing your information in, we can have cash in your account within seven minutes," he said.
For repayment, Kabbage takes a certain amount of money from either the merchant's PayPal or business checking account at the end of each month for six months. However, unlike many merchant cash advance providers - which typically recoup advances by taking a percentage of the merchant's credit card receivables - repayments are made to Kabbage in fixed dollar amounts, Gorlin said.
"[Opening] the account is free, and before you get an advance you'll know exactly what you'll pay back, as opposed to it changing each month," Gorlin said. He added that customers can pay back their advances early without a prepayment penalty.
Gorlin said Kabbage's customers include essentially all merchant verticals, as well as both online and brick-and-mortar merchants. He noted that most brick-and-mortar merchants still have sizable online footprints from activities related to inventory, marketing and taxes, among other things. Kabbage's clients have included a comic book shop that expanded into a full toy store, wedding businesses, medical supply outlets, clothing retailers, jewelers and electronics stores. "Our customers are literally a cross-section of businesses in America, anything and everything," Gorlin said.
He added that, in one instance, Kabbage advanced money to a vintage electronics retailer who was on the verge of collapse after Hurricane Sandy ravaged his Long Island warehouse in 2012. "Now he's back up and running because we provided money at a time when most banks would be running in the other direction," he said.
"We say, 'No, that's the time you go and help him, because you keep them in business ... It's the same thing if someone has a sickness in their family and has to [close shop] for a time. That's not a problem with the merchant. Even good ownership sometimes hits a bump in the road."
Merchants partnered with Kabbage typically use advances to expand inventory, hire new employees, and add locations or floor space. Advances currently range from $500 to $50,000, although Gorlin said the company is testing advances in the range of $100,000. He added that Kabbage has about 100,000 clients on its platform.
Customers who have questions or feedback have an easy time reaching company officials because the automation of underwriting frees up extra time to field calls and emails, Gorlin pointed out. "If you call us or email us, you'll get immediate responses back because we can afford to do that and be helpful," he said.
"Because the system is automated, and because so few of our [clients] need [serious] help, we have the time to help the few who do. And all of us are people who've been in the business a long time and understand it, and who make a strong effort to hear and understand our customers."
Kabbage recently partnered with Authorize.Net to expand its reach to new merchants and to utilize the company's vast repository of processing data, Gorlin said. "We're pretty stoked about adding Authorize.Net, and we're continuing to talk to other processors and ISOs out there that are interested in Kabbage [for use with their merchants]," he said. "We want to continue to expand our presence with merchants around the country."
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