I spend a lot of time working with companies that provide alternative funding sources for small businesses. Many of them are addressing the entrepreneurs out there who are just starting their businesses, and that’s an essential service, but something I’ve been hearing a lot about lately is a financial service for entrepreneurs further along in the business life cycle.

It’s called a working capital loan.

A working capital loan is designed to temporarily increase a business’s cash flow. Working capital loans are a particularly great resource for business owners who want to take advantage of a time-sensitive sales opportunity that requires an increase in inventory or payroll expenses.

I recently had the opportunity to interview Rob Frohwein, an expert on working capital loans and the CEO of Kabbage, a working capital lender. He has some great advice for business owners considering applying for a working capital loan, including tips on how to increase your chances of approval. You can listen to the interview in the video below, or read the transcript.


YouTube video

Video Transcript:

Peter: Hello everybody, this is Peter Thorsson from Palo Alto Software, and I’ve got Rob Frohwein on the call here. We are going to talk a little bit about Kabbage and lending for small businesses in general. Hi Rob.

Rob: Hey Peter. Great to be on, thanks for having me on.

Peter: So our audience is mostly small- to medium-sized businesses, a lot of whom are interested in finding funding, knowing how to get money for their business, knowing how to keep stock on the shelves. How does Kabbage help them, and can you just give us a little bit of background on the company?

Rob: Sure, absolutely, I’d be happy to do that. Kabbage provides working capital to small businesses, and we do that through a very data- and technology-driven platform. So we do it very differently than any traditional finance company would go about getting to know a small business and making a decision as to whether to provide them with capital or not.

Peter: That’s great. And how does that make you different from a more traditional lender or an SBA lender?

Rob: It’s interesting. First of all, small businesses have always been, unfortunately, the disadvantaged child of the financial services industry. So you have a lot of situations where small businesses simply can’t access capital at all from a traditional lender. If you go in as a small business to a bank, what they are used to doing is turning you into a consumer and looking at your credit score and taking you through a tremendous amount of paperwork, a lot of time, a lot of meetings. And then ultimately—many, many weeks later—it’s typically a “no”.

So what we’ve done is we have basically said that small businesses are our customer. And guess what? They use the internet and they use other companies with whom we have relationships. We can pull data directly from those companies with our customer’s permission and be able to make a decision very fast. So a small business can land on our site and actually have cash in their account within 7 minutes. This is the typical time frame from literally landing on our site to applying and having access to cash.

The other thing is that, with the way we have set up our product, it is essentially like a line. So you can go in and take cash when you need it assuming that you have availability much like you would on your credit card. So a very, very different process. Instead of seven weeks, we are seven minutes and typically a “yes” for a small business.

Peter: That’s fantastic. So the speed is probably critical for their inventory needs and getting that money in quickly. For a small business owner who is just listening to this and learning about Kabbage for the first time, how would I know if I’m a good fit, and how can I find out whether I am appropriate for a Kabbage loan?

Rob: That’s a great question. Typically it’s a small business that has at least a couple of thousand dollars of revenue per month. So we don’t really have a high threshold. We just want to make sure you’re an actual business, and this is not you selling your old skateboard from when you were twelve years old out of your garage. We are looking for people who have an active business that they’re running. It can be a part-time business or a side business, it doesn’t have to be what you do every day and every minute of your life, but it’s got to be a real business.

Number two, the way we typically work is that you should just come on the site, kabbage.com. What we do is we connect to key data sources that relate likely to your business. So if you use QuickBooks to do your books, or you ship via UPS, or you sell on Amazon, or you sell on eBay, or you transact business over PayPal, we have lots and lots of data sources that we connect to. Assuming that you connect to one or more of the data sources that are important to us to understand how your business is operating, we are a great fit for you.

Within the next 60 days, we will literally be applicable to every small business on the planet, or at least in the United and States and United Kingdom. If you have a business checking account, we will be able to underwrite you primarily on that basis alone. So we are really a good fit as long as you have a minimum amount of revenue and you are actually a small business and you can connect us to the data sources that help you understand your business.

Peter: That’s great. So really when you say connecting to, say, an Amazon or another data source that I’m connected with, the point there is to allow you to get that fast approval and to prove that I am maybe selling what I say I’m selling or have the revenue I say I have.

Rob: Yeah, that’s a perfect way to sum it up. So as opposed to what happens when you walk into a bank (you might have to literally bring over 3 reams of paper that represent your last 3 years of tax returns, or you’ve printed out your register from customers paying for their products) you can literally just connect us to those data sources, and we do all the heavy lifting. And that’s why we can do it that quickly. So that’s exactly right.

Peter: That’s fantastic. I think from the Palo Alto Software perspective, we’d say, in many cases, the traditional business plan, again here’s an example where it’s not really necessary but it is absolutely critical to have a keen eye for those key performance indicators of your business. Where is that revenue coming from? Where is it going? And again, here in Kabbage’s case, it sounds like that’s going to get you money fast and easy, and everyone always wants that. So that’s great.

So I guess from your end, what advice if I’m a small business, and I’m excited about this, I know I need the money, what can I do to ensure that I’m the best candidate if I go to your site right now?

Rob: We look at a couple of things when we’re looking at this. Obviously, first of all, we are trying to make a judgment automatically, if you will, as to how you’ve been running your business, what’s the appropriate amount of capital for us to give you for your business, and obviously the likelihood that you will ultimately pay us back. So the things we try to look at: Are you running your business consistently? Do you have revenue that is coming through on a consistent basis? That’s one of the key things.  How are you taking care of your customers? So we are looking at all sorts of review information and other factors about your business, because if you are taking care of your customers you’re probably going to take care of your vendors, too. So that’s a pretty important rate for us.

And then we also look for how long that business has been running. What’s really interesting about us, whereas most folks that are in our space are looking for a 10-year track record, we want to know that you’ve been doing it for a least 6 or 9 months. It doesn’t have to be something you’ve been doing your whole life. But we want to make sure you’re not just opening up the door up today and looking for a loan, that it’s actually a legitimate, real business, and you’ve put some skin in the game as well over the last many months in building that business.

They’re really not factors that are very different from how you run a successful business. If you are taking care of your customer, if you are focused on building your revenue base, those are the types of things that are important to us and that’s the kind of thing that would be important to you as a business owner.

That’s probably the best advice I can give. It’s the same advice we have for ourselves, because we find ourselves in that same position. When you’re in the business of giving money or handing out money to small businesses, we are always in the search for capital ourselves to be able to then provide on to our customers. And we have to prove the same things to the people who want to give us financing. So we’ve been there, we’ve had to prove ourselves, we’ve gotten over bumps in the past just like every small business owner has. The key is that you’ve just got to stick to it, and make sure that you’re generally heading in the right direction.

Peter: So Rob, as a small business, how does somebody distinguish whether they should take out a line of credit of their own, take money from a friend maybe as a loan, friend and family sort of lending partner, maybe go to their local SBDC office, or use Kabbage as their source of funding?

Rob: Well, I think the key is trying to figure out exactly what you’re using the capital for. One of the things that we always try to educate our customers about is: Why are you accessing capital? Whether it’s some form of using your credit card or going to your rich uncle if we were all so lucky to have one, or using even Kabbage.

And the answer to that is it really just depends on, from our perspective, the return on that investment that you are going to make. So a lot of people say to us, “OK, if I have $2,000 available on my credit card, and I have $2,000 available from Kabbage, which one should I use?” And my answer is maybe neither, maybe the credit card, or maybe both. And that really just depends.

The “both” answer I’ll answer that right off the top. So say, for example, you now have the opportunity to acquire $4,000 in inventory and that you could turn that within 30 days for $10,000. So you can make 150% on top of what you put out for the capital. You have $2,000 available on your credit card and $2,000 available via Kabbage. Should you just pick one or the other? The question is, if you’re able to literally make $6,000 on taking both forms of capital and paying them back within that 30-day period for a small amount of actual money out, it makes sense to use both.

So a lot of our customers will come to us, and they’ll basically take a couple thousand dollars from us. They’ll turn that into $5,000, they’ll pay us back the $2,000, plus they may pay us $100 as a fee on top of that $2,000. They’ve invested $2,000 in inventory and $100 with us. $2,100 in order to make $2,900—that is a good bet everyday of the week. And so a lot of times you need to make a decision as to what the ROI is available. If you only have the need for $2,000 in my prior example, and you have $2,000 on each, you try to calculate what would be the lowest cost capital, what would be the highest potential ROI you have on the money that you are using to purchase the inventory.

To us, we always recommend that people do an ROI analysis to really figure out how they’re going to make money off of it. We tend to say that our capital is not the best capital if you’re going to go out and purchase a TV for the office or a new conference room table—things that have a very long, or maybe even no, ROI associated with them. Does that make sense?

Peter:  Very interesting. Yes, absolutely. Rob, just one follow-up question: We here across Bplans, LivePlan and all throughout Palo Alto Software, we love helping small businesses. Sometimes there’s really great stories of success. Do you have a favorite story of a business you’ve helped over the years?

Rob: I have probably 1,000 of them. There’s one customer—and I’m going to try to maintain anonymity right now, but we have one customer—who we helped get off the ground in selling wigs. And it’s actually a really great story. She herself had been ill and had cancer and actually had lost her hair during her treatment, and she was really committed to creating not just wigs for patients that are going through similar treatment, but creating crazy and cool wigs for people that are going through what is a very challenging time in their life.

So she had gotten the business going, she was generating some revenue, and she came to us because she really wanted to expand, and we did give her access to capital. She has been able to grow her business probably ten-fold just over the last 12 months, investing the money that we gave her into sourcing more product and more designers for very cool wigs.

It’s one of the really important parts of our business. We actually went back and did analysis of our customers and what their revenue is because we continue to have access to these data sources after they become customers. We can actually do analysis and say, “How  much has the working capital that we have given them helped their business?”

Our customers, on average, have grown their businesses by 78% from the period prior to utilizing Kabbage to the same period following utilizing Kabbage. One of the key things is to educate our customer-base as to the benefits of using working capital and using it wisely, and ultimately to grow a great business and really participate in a great part of the American economy, which is entrepreneurism, which accounts for more half of all jobs in the U.S. today.

Peter: That’s fantastic, and that’s really what keeps us going here too. It’s real humans behind real stories running small businesses across America. Rob, thanks for your time today. This is great to learn about.

Rob: Thank you, I really appreciate it.

Peter: I hope our users have learned a lot and will keep learning more.

AvatarPeter Thorsson

Peter Thorsson leads business development, sales, and strategic partnership work for Palo Alto Software, makers of LivePlan, where he creates relationships and programs that help entrepreneurs succeed. Peter has also started and sold a successful business with revenues over $1MM, directed Strategic Partnerships for Nickelodeon and Comedy Central, organized local Startup Weekend events, and judged business competitions for Rice, Princeton, Notre Dame, and others. Peter has taught contemporary business planning—from concept to execution—for many years in venues including Lane Community College, University of Oregon, Oregon SBDC, and Oregon SCORE. As a volunteer, Peter is the past president of the Board of Directors for Committed Partners for Youth in Lane County, formerly Big Brothers Big Sisters of America, and Board Director for Boys & Girls Club of Emerald Valley. He has also mentored individual local youth and local small businesses.