Funding Firm Targets Small CE E-Tailers Shunned by Regular Banks

Online retailers without a brick-and-mortar presence have a difficult time expanding their businesses through traditional financial services companies, said Marc Gorlin, chairman of Kabbage, a funding company heading to CES next month to promote its funding and data collection services for small online businesses.

Kabbage provides working capital to small online merchants who sell on marketplaces such as eBay, Amazon, Yahoo and Etsy, Gorlin said. Kabbage uses what it calls “nonstandard” data beyond a credit report to “take someone from landing on our site, entering information about sales channels, business and personal information, to having money in their account in less than 10 minutes,” he said. The company offers funding lines, in a fee-based structure, ranging from $500-$40,000, he said.

Small online business customers who seek loans from banks often have to wait months to secure additional funding, or aren’t approved at all because of a business model that’s foreign to traditional lenders, Gorlin said. According to the company, big banks only approved roughly 9 percent of loan applications in October. Kabbage charges a fee to customers for working capital, and customers have up to 6 months, with no pre-payment penalty, to pay it back, he said. Regarding how those fees compare with commercial bank loans, Kabbage fees are lower than merchant cash advance fees and “can be equal” to what small business credit cards charge, Gorlin said. Riskier clients’ fees “are a little north of that,” he said. In addition to credit ratings, fees are determined by how well stores are doing and shipping information.

This CES will be Kabbage’s first, though most of its customers do some amount of CE retailing, Gorlin said. Through eBay alone, Kabbage’s customers will do $64 million to $65 million in consumer electronics this year, he said. Kabbage analyzes data from sites to make funding decisions and submits those funds through PayPal, he said.

In Kabbage’s early research of the CE industry, executives questioned the significance of electronics retailing to its business because of low margins in categories such as DVD players and TVs. “It would take capital to grow that business, and you have to add cost to that,” he said. They were surprised to find margins can be made with older product. Many small retailers boost margins by selling “last-year’s model” at a significant discount and the margins in those products “are well beyond what you would get on a new product,” he said.

Overall, CE is “alive and thriving for small businesses that sell online,” Gorlin said. Nearly half of Kabbage’s customers “sell CE in some way, shape or form,” he said, saying the resellers might also sell backpacks and other unrelated items. The company doesn’t want the guy selling “a few skateboards out of his garage a month,” but would look at a company “doing in the small thousands per month,” he said. “We recognize that some small businesses start small,” he said, but some Kabbage customers post volume of $8 million to $10 million per year. “You'd be shocked at how many small businesses occasionally -- even if they're doing in the millions of dollars of revenue -- need a quick shot in the arm of $30,000 to $40,000,” he said.

"Every small business needs someone to pay attention to them because banks are not,” Gorlin said. Online businesses in particular are the “ugly duckling of small business even though they represent a high amount of consumer spend,” he said. The retailers Kabbage is targeting represent from “$50,000 to $100,000 or even millions of dollars a year,” he said. Where a bank reviewing a loan application would walk the floors of a retail store, collect paperwork and financials that can take months, “someone could be doing well more in their online hardware business than in offline businesses down the street, but they don’t get credit for that because they're doing it online and getting paid through PayPal,” he said. “A lot of banks either don’t pay attention to them or don’t take them seriously.” Kabbage has an automated process, tweaked on an ongoing basis with additional data, to determine the fee structure it charges an online business for capital, he said.

Kabbage is learning from the data it collects including what’s important and not about the online selling space, Gorlin said. Currently the company is using the data it collects to assess risk and offer e-tailers money, but the data could be useful down the road for e-tailers looking to lease office equipment or cars at reasonable rates, he said. “There’s data out there online, and if it’s collected and viewed in the proper way, you can get a real good sense of businesses,” he said. Online retailers shouldn’t be at a competitive disadvantage financially just because they sell online, he said. “Online business is real business and the support systems getting in place to help these businesses grow are going to do well whether it’s providing them capital or providing data to help other businesses understand them better,” he said.