Kabbage: The Merchant Cash Advance of the Online Business World
August 23, 2011
Show me the Kabbage! Kabbage offers working capital to Ebay sellers that have difficulty qualifying for a bank loan. 
They describe their financial product as an advance and funds are collected back automatically via the seller’s PayPal account. Sound strikingly similiar to something else?
Kathryn Petralia, the COO of Kabbage provided details in an interview with practicalcommerce.com. Funding ranges from $2,000 to $15,000 and approval is based on the following factors:
- Minimum 1 year in business
- Historical Ebay sales volume
- Historical PayPal account activity
- Credit score (although they are flexible)
- Business type
- Chargeback history
Petralia describes the cost as fee based, not rate based. “So it’s a maximum six month period that an advance can be held by a merchant and all of the merchants have to enroll in auto-payback system via PayPal. We automatically take a percentage of the initial advance amount every month. So the idea is in no more than six months, this sum of money will be paid off. A business will not be approved for an amount they cannot payback in that timeframe.”
Take away the fixed timeframe and we have all the signature features of a Merchant Cash Advance (MCA). The term loan, is even for the most part absent from Kabbage’s website. It’s difficult to overlook another feature of Kabbage, the ability to obtain funds in 10 minutes.
It’s easy to see if you qualify for an advance with Kabbage. Do you have about 5 seconds to spend with us? Simply enter your eBay marketplace ID and we will start the process. If you have sufficient activity and a great history of selling on eBay, we will then ask you to complete our application. You can go from eBay ID to cash (in your PayPal account) in as few as 10 minutes!
10 minutes? Traditional MCA funders don’t move THAT fast, nor should they. There’s a few things that alternative funding sources have learned since the financial crisis, and that’s not to go overboard. Funding in 10 minutes is great for the business owner, but doesn’t give the funding company any time to actually underwrite the deal. There’s a few questions we would like Kabbage to answer or consider.
- Do you ask where your applicants store their inventory?
- Is drop shipping an acceptable business model?
- Do you ask applicants if they’re current on their business property or home? If they’re renting a location, this isn’t going to show up on their credit report. If they’re on the verge of eviction, how would you know?
- Do you require contact information for any of their suppliers?
- Do you perform a criminal background check on your applicants?
- If the business conducts sales on a separate website in addition to their Ebay store, what’s to prevent them from discontinuing their Ebay operation while a balance is outstanding?
- What is the recourse in the case of default? What collateral is there?
- What if a business stops using the designated PayPal account and starts using another one. Are there any worthwhile deterrents?
- What if Ebay changes how they conduct business in a way that prevents or decreases the sales capability of their sellers? Are you prepared to adapt?
Though Kabbage is not exactly a Merchant Cash Advance, it’s close enough that we should welcome them to the community. A few tips for these folks though. The more automated the approval process, the higher the default rate. Does a business really need funding in 10 minutes or less? Also, the less grounded a business is, such as a long term lease in a brick and mortar location vs. an Ebay store, the less likely they will survive in the long run.
Good luck!
– The Merchant Cash Advance Resource
Our Favorite Merchant Cash Advance Commercials
August 23, 2011Posted on May 7, 2011 at 1:23 AM
TV has never been a popular venue for Merchant Cash Advance (MCA) providers to advertise. There is a highly specific target market, small business owners that accept credit cards as a form of payment that are looking for funding, that simply reduces the cost effectiveness of mass media. Why pay to reach 100 people when 97 of them may not even fit basic criteria such as owning a business? It doesn’t make sense.
That doesn’t mean that TV or online video commercials for MCA don’t exist, they do. Unfortunately most of them tend to be poorly self-produced webcam miniclips that are so boring, they are more likely to turn someone away from the product, than to help anyone. No offense. But there are some providers that actually took the time, effort, and money to create something worth watching. Here are some of our favorites:
Does anyone else have one they’d like to share? We’ll be happy to show it off!
– The Merchant Cash Advance Resource
Merchant Cash Advance 2nd Quarter 2011 Stats
August 23, 2011
Like following the Merchant Cash Advance industry statistics? Whether you agree or disagree with our findings, we’re planning on releasing the 2nd Quarter MCA statistics in the next month or so. Our research method is constantly being improved in order to quantify the industry as accurately as possible.
The industry hit a big lull in the first quarter, mainly due to the stalling of funding in California. Preliminary reports and experience reveal that funding in California is back on the rise. Bank lending is still non-existent and new players are joining the space every month so it will be interesting to see how things are shaping up.
While you’re waiting, look back at the all the previous data: Merchant Cash Advance Industry Statistics
– The Merchant Cash Advance Resource
Starting a Business – Read First
August 22, 2011Jerry had a business plan and some money set aside for startup capital. He assumed that’s all he needed, but six weeks later he was already out of business. What went wrong?
Starting a business is exciting and some entrepreneurs even describe getting an adrenaline rush as they approach opening day. But this impulsivity forward can lead to major mistakes, careless decisions, and ultimately put you on the path to failure. If you’ve got a lease on a storefront that opens May 1st, you should aim to open the business on May 1st. But if you are not prepared to handle the demands of your customers or conduct operations most efficiently, then you shouldn’t open just for the sake of opening.
- What can go wrong the week before opening – April 24th
1. Choosing vendors out of convenience or because they can meet an arbitrary deadline
Example: You’ve spoken to two advertising agencies about your startup. Both have quoted the same price. Company A can put together a promotional campaign by May 1st, your opening day. Company B can put together a promotional Campaign by May 18th, but it will be much more effective and reach a larger audience. Company B’s campaign is far more likely to bring in customers for the same price.
Believe it or not, with all the stress and time against their side, many entrepreneurs would rather pick Company A just for the immediate relief. It coincides with their opening day and it would feel great to have one less thing to worry about. But Company B would generate more revenue for them and thus would probably be the smarter decision.
2. Looking at the process like a checklist
Let’s say you’ve created a series of basic steps that must be completed before May 1st. In the last week, you go back to check and make sure they’re all done or to find out what you have left.
Example:
1. Create business plan
2. Raise capital
3. Lease store space or office space
4. Choose vendors for inventory, supplies, and equipment
5. Advertise
If your list is as basic as this, you’ve already failed. Each step should have a series of substeps.
Example:
1. Create business plan
– Survey prospects to determine if there is demand for this product (Don’t ask your family. They don’t count)
– Obtain a 2nd opinion from a qualified business advisor on your business plan
– Locate 10 weaknesses or shortcomings of your business plan (if you can’t find 10, you’re giving yourself too much credit)
– Find proof that a similar business model has worked before and dissect their plan
2. Raise capital
– Determine how much equity you are willing to sacrifice
– Set realistic goals for when your business will be able to start making payments, how often you can make payments, and how much you can afford in each payment
3. Lease store space or office space
– Determine several locations that would be ideal to reach your target market, whether or not there is space available there
– Determine if there is a way to obtain space in that area (sublease, a landlord looking to replace a tenant etc.)
– Determine which locations are actually available to lease
– Determine if any of them are suitable for your business (if none, DON’T open!)
– Determine if the costs justify the level of success you can achieve in that location
4. Choose vendors for inventory, supplies, and equipment
– Seek out terms on inventory as opposed to COD (very difficult for a startup to attain but it would be a huge difference in cash flow)
– Choose reputable vendors (don’t pick the cheapest just because cash is tight in the beginning. Low quality goods may turn your customers away)
– Choose how you will pay for supplies and equipment (lease or purchase. Leasing may be less expensive now but far more costly in the long run)
5. Advertise
– Shop around and learn about all the different ways these firms intend to help you reach your target audience
– Choose the company that will produce the most bang for your buck
– Use common sense (A 3 AM TV commercial is probably not suitable for a toy store etc.)
If you didn’t go through this whole list, there’s a good chance you’ll fail. And just when you think you’re sure you’ve got a handle on everything, buy a few books by people who have been in your shoes. Find out what they did, what challenges they faced, and how they succeeded or failed. We’re not talking about a short article like ours, but rather a full story that shares every detail, thought, and emotional feeling that you can expect to go through. There’s nothing like being prepared and it may even inspire you to modify your business plan as it currently stands. Don’t end up like Jerry. Doing things right is much better than doing things quickly.
The Merchant Cash Advance “Don’ts”
August 22, 2011In sales training, young men and women are taught to negotiate with positive language to close a deal. For example: “We can’t meet the deadline” is replaced with “We can achieve the objective, but we may need to extend the deadline.” Or “We don’t offer that service” is transformed into “We offer many services that can add value to your business but that particular one is a challenge.”We apply a bit of that psychology when developing resources for business owners. People are a lot more open to input when you cast out the negativity. So it’s a bit ironic then that we created a printable reference form, titled The Merchant Cash Advance “Don’ts”. Though it may be perceived as a little condescending, this little banker/business pep talk can protect you from making a major mistake that could cost your business money. So keep it handy even if you don’t plan on applying in the near future.
1. Don’t wait until the last minute to apply for funding.If a firm is advertising funding in 3-5 days, don’t put yourself in a position where you MUST have the funds in 5 days or less. The underwriting process may take longer than you anticipate. The advertised timeframes generally describe a perfect situation. For example: If all documents are received by day 1, all references checked out by day 2, you could potentially receive funds by day 3 assuming the technical setup is already completed. There are situations where business owners have spent 10 days waiting to obtain a copy of their lease from their landlord, which piggybacks onto the 3-5 days. Additionally, supplemental paperwork may be asked for, a trade reference might be unreachable, or your method of card acceptance might require more time to integrate. Anything can happen so don’t wait until the last minute!
2. Don’t lie about your business ownership percentage.This might be seem like silly advice but underwriters report that it’s a growing trend. People with low credit scores tend to assume that they will be declined for their score alone. Therefore they may feel inclined to state that a partner, friend, or family member with excellent credit is the owner of their business and not them. This is bad for several reasons:
- Credit score isn’t the sole determining factor for a Merchant Cash Advance. So why lie?
- Misrepresentation of ownership will be discovered and the application declined.
- Misrepresentation to obtain financing constitutes fraud and is a crime.
3. Don’t lie to the underwriter or your account rep.The liar loans of the mortgage boom ultimately led to the financial crisis and lending shortage. That means the days of declaring whatever you want to obtain the deal you want, are gone. If you state that you generate $100,000 in sales per month, be prepared to show documentation that backs up that claim. Your sales agent or account rep is probably compensated if you close on financing. That doesn’t mean they will help you get there at all cost. They are bound by a certain code of ethics and all applicable laws. If they become aware of any misrepresentation or intended misrepresentation, don’t expect them to be an accomplice to your dishonorable act. If you put them at risk, they will inform the underwriter and terminate your application.
4. Don’t alter any documents.Changing the expiration date on a lease, editing out the embarrassing withdrawals from the bank statements, or any other more or less blatant alteration will result in a rejection. Merchant Cash Advance underwriters are extremely adept in detecting alterations and fraud. Altering documents in an attempt to secure financing is a crime. You are well advised not to try this, no matter how harmless you may perceive the alteration to be.
5. Don’t over shop for a deal.You are entitled to obtain quotes from multiple sources, but don’t press your luck. Too many credit inquiries can spook an underwriter. For one, it tends to drive down the margins that will be earned because competition, thus making the deal less profitable for them and less attractive to put on the books. On the other hand, they may suspect that the other firms declined you and therefore they are being picked as a last resort. When underwriters start to feel this way, your approval may be retracted and it can be a tough battle to convince them to change it back.
We promise next time to provide a guide full of “Do’s”! But for now, we’re making it a point that Merchant Cash Advance is a serious business. The process may be fast and easy, but don’t get too comfortable and make claims you can’t back up. That will lead nowhere good…
– The Merchant Cash Advance Resource
http://www.merchantcashadvanceresource.com
Deja vu? Merchant Cash Advance in Wall Street Journal
August 10, 2011
Have you ever had a deja vu moment where you feel like something has happened already even though it hasn’t? And then all of the sudden it happens? Yeah, we just got a little of that. Or maybe we’re just psychic.
It was just a couple months ago that we published a scathing editorial on the failure of the Merchant Cash Advance (MCA) industry to reach mainstream acceptance. (See: The Colossal Marketing Failure of the Merchant Cash Advance Product – June 28th, 2011). Most of our readers acknowledged the shortcomings but were at a loss for suggestions to overcome them. ISO&Agent Magazine quickly added their two cents by claiming that MCA was waiting for its big moment (See: Cash Advances: Negotiating a Maturing Market – July 26th, 2011) but completely missed the mark when they identified cost as the obstacle holding it back. It’s not cost, it’s communication.
How often is MCA cited in mainstream news publications? Wall Street Journal? New York Times?
-direct quote from our piece on June 28th
Today we can say that Merchant Cash Advance got its mention in the Wall Street Journal. :::Applause::: Though it’s only in their blog section, most people today get their news online anyway. The article features AdvanceMe, the largest and oldest player of the bunch. So how does the glorification of one company carry over to the industry as a whole? There were a bunch of good messages in there that describe the product itself: The article title implies it’s becoming more popular: “Cash-Advance Demand Rising” A description of how it works: “Merchant cash advances, which first appeared about a decade ago, provide capital in exchange for a share of future debit or credit-card sales. As such, they tend to be used by retailers, restaurants and other small businesses where a large number of customers pay with cards.”The common uses for it: “Business owners use the cash to buy new equipment, restock inventory or pay off debt” Yes, Yes, and Yes. Good for AdvanceMe and good for the MCA industry but this is only the beginning.
Every business owner should be aware of MCA, not just the ones that read the Journal today. It is Un-American (Yeah, that’s right) to withhold information from business owners that may enable them to capitalize on opportunities. With no bank loans available, most projects in this country are on hold. It’s simply not fair. We badly want to take the credit for today’s Journal mention, especially since we delivered our two previous articles on this topic to their editors in July. But the real hero here is AdvanceMe. Their press release the day before clearly caught the attention of the mainstream media. Great job guys. And we’d be remiss if we didn’t point out they forecasted an increase in funding by $1 billion in the next 2 years. That’s about equal to the industry’s entire volume combined. Is Merchant Cash Advance about to hit its growth spurt? AdvanceMe seems to think so. If they’re about to have their ‘moment‘, they’ll likely pull everyone else along with them.
– deBanked
https://debanked.com
