Taking Over Small Business Lending From the Banks

kabbage online smb lending

Five years ago, 95% of Kabbage’s loans went to eBay businesses. Today, 90% of the company’s loans are extended to brick-and-mortar businesses representing a seismic shift in how the direct lender has transformed since its founding in 2009. Co-founder and CEO Rob Frohwein got the idea for Kabbage from his own knowledge of eBay. He […]

kabbage online smb lending

Five years ago, 95% of Kabbage’s loans went to eBay businesses. Today, 90% of the company’s loans are extended to brick-and-mortar businesses representing a seismic shift in how the direct lender has transformed since its founding in 2009. Co-founder and CEO Rob Frohwein got the idea for Kabbage from his own knowledge of eBay. He wanted to give third parties access to business financing and developed a platform for underwriting small business loans to those types of businesses.

Headquartered in Atlanta, Frohwein recruited Kathryn Petralia, who serves as head of operations, and Marc Gorlin, no longer with the company, as co-founders. Despite being a balance sheet lender, Kabbage does have its partners. Victory Park Capital provides most of the funding for its debt while Mohr Davidow, ING, and other investors cover its equity funding.

On August 3rd of this year, Kabbage completed a Series F funding round of $250 million led by the SoftBank Group. That amount brought their total raised through the six rounds to $488,650,000. The company’s A series round in January 2011 raised a modest $6.65 million, with BlueRun serving as the lead investor. Their funding has progressed steadily. Series F almost doubled Series E, which raised $135 million in October 2015. Reverence Capital led that round.

A founding member of the Innovative Lending Platform Association (ILPA), Kabbage is an online lender motivated by unique and interesting data and is one of the largest U.S.-based nonbank lenders to small businesses.

Partnership Highlights

Kabbage has enjoyed a stellar history of partnerships, almost right from the beginning. Its first loans were issued in May 2011 based on debt funding from Victory Park Capital. In February the next year, the company entered an agreement with United Parcel Service allowing small businesses to share their shipping histories with Kabbage. Three years later, in March, they partnered with MasterCard to make Kabbage’s data and technology platform, as well as access to working capital, available to MasterCard’s small business partners. Then, in April 2016, the small business lender began servicing Santander UK’s SME customers. A couple of months later, Kabbage announced a partnership with Scotiabank to enable businesses to borrow up to C$100,000 (US$78,290) online in as little as seven minutes. Most recently, in August 2017, the firm received the previously mentioned $250 million investment from SoftBank Group, capital that Frohwein said will help the company expand in the U.S.; launch analytics tools to provide loans for specific verticals; branch into new markets, like Asia; and explore acquisitions to add new products to its inventory.

Petralia shared how the company might also use the SoftBank investment to expand existing technology, such as the Smart Box Disclosure and Loan Comparison tool. Released in 2016, in partnership with OnDeck and CAN Capital, this tool helps small businesses better assess and compare finance options. There was also industry speculation earlier this year that the SoftBank capital might provide Kabbage with the firepower for a potential takeover of OnDeck Capital, which went public in 2014 but has since struggled with growing losses, rising defaults, and higher funding costs. Both Kabbage and OnDeck have been mum about those rumors.

On October 24, 2017, Kabbage and ING announced a partnership to fund small businesses in France and Italy, an expansion of their 2015 partnership in which they did the same in Spain.

Success and Accolades

As the company has expanded its reach around the world, so has its pedigree. In 2012, they were named to Red Herring’s list of the Top 100 private North American companies. In 2013, they made the Fast Company’s Top Ten Most Innovative Companies in Finance list. Forbes added them to the Top 100 Most Promising Companies list in 2014 and 2015. In 2016, CNBC put them on the Annual Disruptor 50 list of the most forward-thinking and ambitious companies revolutionizing industries and markets worldwide. Then, three years in a row (2015, 2016, and 2017), they were included in the Inc. 500 list of the country’s fastest growing private companies.

Still, partnerships and accolades do not necessarily spell success. When banks pulled out of SME lending in the wake of the 2008-09 financial crisis, Kabbage was one of the companies that stepped forward to fill the void and meet the need. To date, they’ve lent $3.5 billion to more than 115,000 small businesses. In fact, they’ve funded $3 million a day, on average.

The Future of Kabbage and Small Business Lending

Petralia says the future for Kabbage is more direct lending underscored by a marked increase in platform partnerships. The company is actively evaluating products to engage small businesses and their direct lending needs.

Further, Petralia promises that, along with companies like PayPal and Square, Kabbage is poised to help lead the industry into a future with more focus on customer experience and a greater focus on the relationship with the borrower. Where traditional financial companies worked with brokers, fintech lenders continue to focus on the relationship with borrowers.

Kabbage is also carving its niche in the future by tapping into the ever-growing diversity in the U.S. population. Petralia is pleased to confirm that the company is reaching the plateaus and celebrating the accomplishments it does on the strength of a leadership structure and work force that boasts a greater mix of women. On average, women account for 26% of the work force in fintech companies, but that mix is as high as 35% at Kabbage, which also boasts four women on its leadership team.

Furthering the company’s ties to diversity, Petralia says the company also exceeds the financial services industry by double in terms of women and minorities customers, as women and minorities are more likely to run small businesses. As the company’s customer application is blind, no concrete data exists on this.

Still, it looks as if Kabbage is poised to continue to spearhead the growth of the online lending industry, and whether Mr. Frohwein envisioned his company filling that void left by the banks or not doesn’t matter. What matters is that Kabbage is on the cutting edge of new direction in small business lending, and it’s paving a path for others to follow.

Authors:

Written by Paul Keenan and Allen Taylor

Allen Taylor

OnDeck Turns 10: Snapshot of its Journey Into an SME Lending Giant

OnDeck Loan Originations

OnDeck, with its vision to provide lending solutions to Small and Medium Enterprises (SME), has gone from strength to strength since its 2007 inception to emerge as the largest online lender to small businesses. It has been able to win in an increasingly competitive environment, is now a listed corporation, and has successfully completed a […]

OnDeck Loan Originations

OnDeck, with its vision to provide lending solutions to Small and Medium Enterprises (SME), has gone from strength to strength since its 2007 inception to emerge as the largest online lender to small businesses. It has been able to win in an increasingly competitive environment, is now a listed corporation, and has successfully completed a decade whereas its peers have faced many strong headwinds. Let´s put light on the journey of OnDeck into an SME lending giant.

OnDeck, an alternative lending platform, entered the P2P lending space in August 2007 with the intention to gain a foothold in SME lending. With its “customer first” philosophy, it has focused on providing speedy, efficient, and top quality lending solutions to SMEs. The company was founded by Mitch Jacob (founder), a serial fintech entrepreneur. So far, OnDeck has provided $7 billion in loans to over 70,000 customers in almost 700 different industries. The company has over 400 employees on its payroll and more than $150 million in annual revenue.

Key Milestones

2007-2010

After originating its first loan in 2007, the SME lending powerhouse leveraged its proprietary technology and data driven OnDeck Score to achieve company revenue of an estimated $15 million in 2010 as compared to $5 million in 2009. The financial crisis of 2008 came as a blessing in disguise for the online lending platform as banks simply vacated the small business lending vertical. This helped the young company to quickly reach the $50 million mark in loans disbursed to over 2,000 small businesses.

2011-2014

2011-2014 was considered as a golden era in the history of the company, as the company grew by 127% (CAGR) during that time. In 2013, it originated $458.9 million of loans in the top five states alone: California, Florida, New York, Texas, and New Jersey; this represented a year-on-year growth of 165% and was ranked 11th in the Forbes’100 Most Promising Companies in America. It was awarded an A+ rating from Better Business Bureau for providing remarkable product and service to its clients.

In May 2014, OnDeck entered into a partnership with BBVA Compass, a customer-centric global financial institution, ranked among the top 25 banks in the US. With the help of OnDeck’s innovative technology and business scoring system, the bank was able to offer customized loans to its small business clientele. In this alliance, BBVA referred their clients to OnDeck for loans, and OnDeck used the BBVA data to underwrite the loans. The partnership was a game changer as banks and fintech lenders had been seen as competitors till then. This model showcased a way where they could work on their individual strengths and be allies. OnDeck flourished in 2014 and originated loans worth $788.3 million during the year and witnessing a year-over-year growth of 171%. By the end of 2014, it crossed the coveted $1 billion mark in originations during the year.

IPO

In December 2014, the online lending platform started trading on New York Stock Exchange under the ticker “ONDK.” It managed to raise $200 million from its IPO, and the firm was valued at $1.32 billion after the end of first day of trading. It was a huge milestone for OnDeck as well as the entire alternate lending industry as OnDeck was only the second P2P company to be listed at that time. With a valuation over $1 billion, the company was catapulted into an elite list of “unicorns.”

2015

Since 2007, OnDeck has facilitated over $1.5 billion in loans across 700 industries in almost all 50 US states.

Another feather in its cap was the partnership with JP Morgan Chase, the country’s largest bank with $2.5 trillion in assets and over $100 billion in revenue. Through this partnership, JP Morgan has been offering small business loans to its 4 million small business accounts. The bank leverages OnDeck’s underwriting technology for quick approvals and funding of their loans. While it is a Chase branded loan and it appears on the bank`s balance sheet, OnDeck provides loan servicing and in return has been receiving originations as well as servicing fee per loan. OnDeck is providing a tailor-made platform keeping in mind JP Morgan’s needs and leveraging the bank’s own client base for customer acquisition.

An In Depth Look at the OnDeck/JPMorgan Chase Deal

Economic Impact

OnDeck commissioned an analysis report to show the positive economic impact its lending had on the economy and society. The report stated the company’s first $3 billion lent to the small businesses powered $11 billion in business activity and created 74,000 jobs nationwide.

Key Highlights

  • In order to remain ahead of its competitors, the online platform is continuing to grow its strategic partner channel. In April 2015, OnDeck collaborated with Angie´s list to give small businesses access to loans up to $250,000. Another strategic alliance was announced in the same month between Prosper Marketplace and OnDeck. The focus is to collectively address the financial needs of customers by offering better, innovative, and customised solutions.
  • OnDeck launched its offices in Australia and Canada. They represent unchartered territories, but the company has the capital and the experience to take advantage of new markets sharing a lot of similar characteristics as its home market.

2016

To maintain its strong value proposition and promote transparency, OnDeck created a group named “Innovative Lending Platform Association” (ILPA) with two other major online lending companies, Kabbage and CAN Capital. ILPA is a trade organization that was formed to ensure transparency and standards around pricing and fees. The association was formed with the motive to create the industry´s first model for pricing disclosure by empowering small businesses to better assess and compare finance options. The initiative resulted in the origination of SMART BoxTM which means ¨Straightford Metrics around Rate and Total Cost .¨

OnDeck also joined hands with Intuit Inc. (NASDAQ: INTU), a financial software company, in June 2016. The alliance launched a new “QuickBooks Financing Line of Credit” that provides small businesses easy access to loans at a low rate of interest. Intuit and OnDeck alliance also launched a $100 million small business lending fund to back the new product.

2017

OnDeck is extending its partnership with JP Morgan Chase by signing a new 4-year contract. The project named Chase Business Quick Capital® will allow OnDeck to increase digital functionality on the platform and target the megabank’s millions of small business clientele.

Measures to turn it into a profitable company

The company has endured a rough time as a listed company in the last few months and this has shown in its annual results. In Q4, 2016 its year-on-year (YOY) growth in loan origination fell to 13% as compared to 27% in Q3. To stop this downward slide, it introduced a “cost rationalization” plan which was focused on tightening credit management and job cuts. Along with this, the following lines of actions were also adopted by the company to reach profitability:

  • As per Q4, 2016 results, staff reduction was expected to be around 11%. But the management revised the staff reduction target to 27% to further continue the cost reduction.
  • The company is moving to a balance sheet lending model to reduce dependence on external lenders.

And not surprisingly, its recovery plan and cost optimization measures started paying off in Q1 2017. The net losses dropped substantially by 68% from $36.5million in Q4, 2016 to $11.6 million in Q1, 2017. And above that, provision for losses also reduced by nearly 17% from $55.7 million to $46.2 million in Q1, 2017.

Stock Price responding to the measures

The price chart clearly shows that the last year was not a good period for the company stock. The stock kept plummeting all through the year. But the measures initiated by the management in the last quarter of 2016 have somewhat stalled the downward spiral and the stock price has finally started to show some resistance.

Conclusion

OnDeck announced Q2, 2017 financial results in August. The lender has managed to narrow down the quarterly losses significantly along with kickstarting a $45 million cost rationalization program. More importantly, the company expects to finally hit GAAP-profitability by the year-end. The company has a strong fundamental base, and its ability to pivot for survival and growth will ensure that the company is here for the long run.

Author:

Written by Heena Dhir.

Making Small Business Lending Simpler With Loan Aggregation

small business loan aggregation

From 2007 to 2013, SME financing hit the skids while annual small business loan origination fell by 54 percent. Twenty-eight million small businesses across the U.S. carry nearly $700 billion in small dollar loans. Furthermore, consumer loans are qualified on the basis of income and credit score, the two basic metrics on which funding is […]

small business loan aggregation

From 2007 to 2013, SME financing hit the skids while annual small business loan origination fell by 54 percent. Twenty-eight million small businesses across the U.S. carry nearly $700 billion in small dollar loans. Furthermore, consumer loans are qualified on the basis of income and credit score, the two basic metrics on which funding is executed. In contrast, SME lending is fragmented in the form of equipment loans, business acquisition loans, commercial real estate loans, invoice financing, and supplier financing. Plus, it requires lenders to evaluate a host of parameters for understanding the creditworthiness of borrowers. Brock Blake believes $1 billion is the benchmark that allows lenders to be more transparent about their volume trends.

Blake, the former CEO of Funding Universe, founded Lendio in 2006 with Trent Miskin and Levi King to make small business lending simpler. Headquartered in South Jordan, Utah, the company has raised $51 million from 11 investors in four funding rounds. Additionally, the company $20 million in October 2016 for expansion. Comcast Ventures and Stereo Capital led the Series D round offering a big vote of confidence in the company even as FinTech lending industry has grown tepid.

Lendio works with more than 75 lenders to enable its customers to compare and contrast varying loan options that include SBA, startup, equipment, commercial real estate, and more. It has facilitated more than 13,000 businesses to raise $250 million through its platform.

How Lendio Aggregates its Loans

Blake confirmed that partner-lenders’ appetite for loan volumes is increasing. Lenders are always on the lookout for creditworthy leads, which allows Lendio to be a full package solution by providing comprehensive and credible information about prospective borrowers. It has also launched a national scholarship program for small businesses and has entered into strategic partnerships with American Express, Staples, and GoDaddy. The company has also announced new partnerships with Townsquare Media and Supplier Success. These initiatives have helped the platform fund $63 million in Q3 2016 alone.

Lendio, in partnership with lenders on the platform, tailors solutions to the borrower. Innovations include flex pay products, mezzanine financing, and larger loans for commercial real estate and business credit card segments. This helps Lendio move up the curve in terms of volume, reach, and profitability. It is always more profitable to execute a $3 million loan than a $3,000 loan, Blake said.

Lendio’s Success is Dependent on Relationships

Lendio has been active on the regulatory front, spending a lot of time educating policymakers and members of Congress about the needs of SMEs and how players in the industry are innovating to help businesses create jobs and wealth. In addition to small business loans, Lendio has organized educational events for small business owners to make their businesses more lending friendly. The company is a member of Electronic Transactions Association (ETA) and has an association with Innovative Lending Platform Association (ILPA) and Coalition for Responsible Business Finance (CRBF).

One initiative supported by Lendio is ILPA’s Straightforward Metrics around Rate and Total Cost (SMART) Box, which focuses on providing transparency to small business owners through standardized pricing tools and comparisons inclusive of various total dollar cost and Annual Percentage Rate (APR) metrics. The company understands that it is a work in progress and believes it is important to incorporate feedback from SMEs and other partners.

Lendio is always working on its product and technology stack to ease the process for both borrower and lender by concentrating on matching algorithms, customer experience, and enhanced automation to increase conversion rates. Blake believes the industry was more focused on loan volume in the previous year; the current scenario has VCs focusing on unit economics and profitability. This is positive for Lendio as the company had started focusing on margins ahead of the curve and this will be reflected in its ability to keep growing without sacrificing margins.

Lendio’s platform has multiple lenders and is on a rapid growth spree. As lenders start from a small base, Lendio is not publishing data around individual lender volumes.

With focused efforts on customer experience, investment in technology, and positive unit economics, Lendio is growing over 100% year over year. Its recent funding round will enable the platform to further establish its hold as the go-to loan aggregator among small business owners. Lendio’s loans are now available in 46 of the 50 states, and the company has been stitching partnerships to grow access to both capital for borrowers and customers for lenders. The market size is huge, and Lendio is in the pole position for capturing a significant market share in a category which was all but abandoned by Wall Street.

Authors:

Written with Heena Dhir.

Allen Taylor