Online Microlenders Offer Capital to Young Businesses

Online Microlenders Offer Capital to Young Businesses
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This story appears in the January 2013 issue of . Subscribe »

In 2008 Chris Byrne opened The Gear Geeks, an eBay store that sells musical equipment, with $2,800 in cash. To purchase inventory, the Huntington Beach, Calif., 'trep relied on a business line of credit from his bank. When the recession caused his credit line to dry up, Byrne turned to Atlanta-based Kabbage, one of several online microlenders that offer short-term capital to young businesses.

The $5,000 credit line Byrne received from Kabbage in August 2011 soon grew to $38,500--nearly three times the amount of his former bank line of $13,500. With the ability to purchase more inventory, he saw his revenue quadruple from $10,000 to $15,000 a month to $40,000 to $60,000.

Kabbage, which launched in November 2010, serves online merchants who sell via Amazon, eBay, Etsy, Shopify and Yahoo. The company uses a merchant cash-advance model. "But it's nothing like your mother's MCA model," says Kabbage co-founder and COO Kathryn Petralia.

Credit lines range from $500 to $50,000, with fees running 2 to 7 percent over 30 days and 10 to 18 percent over six months. Besides the usual banking information, Kabbage's online application draws data from a borrower's e-commerce store and online payment service. Borrowers who also provide access to their UPS, QuickBooks and social media accounts can level up their credit lines.

We spoke with Byrne about the lifeline Kabbage threw him.

Why did you decide to secure funds this way?
My bank was acquired by a larger bank. I had an existing business line of credit, and they just shut it down. My FICO [score] was between 674 and 700 at the time. It made a huge difference in being able to acquire inventory, obviously. We sat frustrated for about a year and a half like that. It really was tough.

What did the application process entail?
I saw the banner on eBay. I clicked it just out of curiosity and went through the process. It was probably 12 minutes before I got approved for $5,000. They actually deposit the funds instantly into PayPal. They really look at the whole picture. It's not just all about the FICO score. They are looking at your [sales] flow, your volume of PayPal, etc.

When did your credit line increase?
I'd learned to rotate stock fairly quickly. We were able to knock out all of the $5,000 and return it in about a week and a half. After repeating that same cycle a couple more times, they raised my limit to about $15,000. After that, it was probably four months, five months before I topped out [at $38,500].

I'm sure we've cleared well over $200,000--probably approaching $250,000 to $300,000--from the time that I signed up with them.

How has access to this capital changed your business?
We're starting to have the headroom to buy whatever we want. We're getting estate liquidations and we're able to buy them out. So now we're turning into an eBay trading assistant more than just a musical-instrument dealer. It's pretty neat.

What are the downsides?
There are cheaper ways to get money if you have really good credit. We just practice a real disciplined thing of taking a draw out, buying only inventory with it and trying to return that draw within 28 days. You really need to be disciplined when you are working with those percentage parameters.

Do you have a personal limit on how much you're willing to draw at once?
Typically I take no more than about 50, maybe 55 or 60, percent of my total credit limit at a time. That's really important. If I'm [close to that], then I know sales are slow.

What advice can you offer others interested in this kind of financing?
Be disciplined with your turnaround times per advance and buy inventory only. Use it for something that's going to generate income for you.

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