“Get money to grow your business in minutes! Now funding ALL small businesses!” Chances are good that you’ve seen these sponsored spots of Facebook, encouraging you to apply for a loan.  I must admit that I’m impressed by what appears to be 4,000 likes and 1,400 shares for this ad.  But it got me wondering about who (or what) Kabbage is, and whether their offer is good.

Businesses traditionally turned to banks for loans for capital, but it has been notoriously difficult to get a bank loan in recent years. This has led many shops to turn to credit cards to finance their inventory, and if the full principal is not paid right away, the interest charge can be exorbitant. 

Kabbage was founded in 2008 by Robert Frohwein. The concept is that the company provides online cash advances to small businesses. If approved, many applicants receive money is as little as seven minutes. Frohwein, who hosted a radio show in Atlanta before founding Kabbage, has already raised $56 million in venture funding from various sources, and Kabbage is now #37 on the Forbes list of Most Promising Companies.

The way that Kabbage works is by pre-qualifying a business online for a line of credit (they intentionally don’t use the term “loan”) ranging from $500 to $100,000. The amount depends on a number of factors — including social media activity — determined by the company.  Kabbage particularly targets merchants who sell through online marketplaces such as eBay, Amazon, Etsy, Shopify, and the Yahoo! Store.  When funds are needed, the approved business can draw from its credit line immediately.  A draw can be done once a day, and must be repaid within 6 months.

What does this cost? Here is the answer from the company’s web site: “The cost structure of our loans is straightforward. We don’t charge any interest. Instead, loan fees are assessed. Fees are 1% – 12% of your selected loan amount the first 2 months and 1% for each of the remaining 4 months. Every month, for six months, you pay back 1/6th of the total loan amount plus the monthly fee. There are no early payment fees.”

According to a recent interview with Frohwein in The Wall Street Journal, the typical Kabbage credit line is $10,000 to $20,000 Businesses pay more the longer the credit is outstanding, with rates ranging from 2% to 20%, he said. Kabbage is now offering lines of credit in the UK as well as in the US.

You will note that the company sets up a system for automatic repayment, usually through a direct debit of your bank or Paypal account.  If you are comfortable with that repayment method (and the six month limit), and if you find their “fees” better than your credit card interest rate, then Kabbage may be a viable way to finance an increase in your inventory. But the rates will still be higher than an SBA loan through a bank, so be sure to explore all your options carefully.

Happy Retailing,

Carol “Orange” Schroeder