Kabbage, a billion-dollar startup that combines machine learning algorithms, data from public profiles on the internet and other factors to rate and then loan people money for their small businesses, is today announcing another big step up in its ambitions. The company has secured over $500 million in fixed-rate, asset-backed notes, money that it will use to expand the amount, payback terms and size of loans it makes to SMBs over the next three years. To date, Kabbage has loaned over $2.7 billion to SMBs since being founded in 2009.
Kabbage said the securitization was oversubscribed. In fact, last night, when I interviewed Kevin Phillips, head of corporate development and one of the people who built Kabbage’s original platform when it was founded in Atlanta, Georgia, he told me that by the time the securitization closes (around March 20), it’s likely to be a little higher than $500 million, maybe more like $525 million, due to interest from institutional investors and others.
Guggenheim Securities, a previous backer of Kabbage who was behind a $270 million credit line to the company in 2014, is serving as sole structuring advisor and initial purchaser of the notes.
Kabbage’s rising fortunes are coming at critical point for the online small business loan market.
Can Capital — which had been the largest online lender to SMBs in the U.S. — last year halted new loans as it changed management and restructured the company.
And OnDeck, which is publicly traded, last month reported a record loss. One big problem has been investor confidence in the business models themselves: there are many (too many?) loans going out and some are concerned that many will never be paid back because the vetting process has not been strong enough amid a changing market for SMBs.
Amid this turmoil, which has hit the wider online lending market, too, Kabbage (a pun on “cabbage” which itself is slang for money) is standing out both for SMBs, but specifically here for investors, as it positions itself “less fin, and more tech” in the words of Phillips.
The company has focused mainly on loans with a six-month payback up to now, and it claims to have a loss rate — the amount of money on each dollar that does not get paid back — lower than the rest of the industry, including institutional banks (it’s not publicly disclosing that loss rate). The startup makes revenues on fees around the loans, and last year saw its direct lending business turn profitable in Q4, with the whole business expected to be profitable in the second half of this year, Phillips told me.
For this reason, it’s not actively seeking equity funding at this point although it wouldn’t turn good offers away. “We’re always listening when funds call us,” Phillips said. “At the right price we’re willing to listen to inbound equity inquiries.” Its last equity round was for $135 million in 2015.
As part of this closing, Kabbage is forming a new subsidiary,Kabbage Asset Securitization, to issue the notes in four classes. Kabbage said that the senior class of notes is “anticipated to be rated ‘A(sf)’ on the closing date by Kroll Bond Rating Agency (KBRA).”
Kabbage notes that this is an upgrade on its previous rating. “Kabbage’s strong historical performance over the last three years played a key part in KBRA’s upgrade,” said Anthony Nocera, Managing Director at KBRA, in a statement. “The upgrade is based on several structural improvements and the existence of more historical performance data relating to Kabbage’s collateral.”