Lender Kabbage Furloughs Workers, Warns Of SMB Cash Shortfall

As COVID-19 saps consumer demand across all manner of verticals, and small businesses bear the brunt of a sudden disappearance of revenues, the firms that lend to those SMBs are feeling heat, too.

The most immediate casualty seems to be Kabbage, which, per a company memo viewed by TechCrunch, will furlough a “significant number” of its U.S. staff, which has 500 employees.

The company is also reportedly “completely” closing down its Bangalore, India, operations.  The company’s executive staff members will take a “considerable” pay cut.

A Kabbage spokesman declined to comment on the report, but company co-founder and CEO Rob Frohwein wrote in the memo as relayed by TechCrunch that “we realize this is a shock to everyone. No business in the world could have prepared for what has transpired these past few weeks and everyone has been impacted.”

The executive said that many of the smaller firms in the U.S. “will no have the cash to last 10 days without revenue … and we are already well past that window.”

Ironically, Frohwein had written in a blog post just weeks ago that a three-week global quarantine would be a way to combat the pandemic.

“It would mean sacrificing the way of life to which we’ve become accustomed for about 21 days and it would probably take up to two weeks to put the plan in motion,” he wrote. “Apparently, three weeks is the maximum amount of time required for the virus to manifest itself and, consequently, to commence treatment and identification of anyone else who may have come into contact with the infected.”

Still, the urgency and speed of Kabbage’s latest moves comes even as the U.S. government’s $2 trillion stimulus package allows a number of entities — FDIC banks, credit unions and, most notably for this discussion, FinTechs such as Kabbage — to make loans to smaller firms. In addition, the Small Business Administration has one million claims on its proverbial desk for disaster relief loans.

We note that when applying for loans, firms typically demonstrate operating histories and revenue and cash-flow streams, which of course can help determine creditworthiness.

The absence of top line, which translates into cash, likely shuts at least some conduits for lending. And loans that are already “out in the field” so to speak (smaller firms can tap loans up to $250,000 and where Kabbage’s fees range between 1.25 percent to 10 percent), may be the very ones facing a skid into delinquencies. The availability of capital also may be less robust than it once was.

In an attempt to offer at least some top-line offset for smaller firms, the FinTech said last week that it had launched an online hub called HelpSmallBusinesses.com through which consumers can purchase gift certificates from SMBs (each certificate can be between $15 to $100).

On Monday, the company announced that it is expanding the program, with several U.S. companies joining the effort. Kabbage noted it will not profit from the effort, with other participating companies — including Alibaba.com, Gusto, Lendio, Nav, UPS and several others — making similar pledges.

In a statement announcing the program’s expansion, CEO Frohwein said there was a “unique opportunity” for businesses to come together and assist those who may be hit the hardest by the complete destruction of many of their revenue streams right now.

But for FinTechs such as Kabbage, a real test is underway. Underwriting and working with lenders such as Utah’s Celtic Bank (which issues the loans) only works if firms are in business long enough to tap those loans.

Kabbage also has a custom loan feature through Kabbage Payments — and as noted in this space last month, SMBs can choose repayment terms ranging from three and 45 days. When the loan reaches maturity, customers can either pay it in full or allocate a portion of Kabbage Payments toward the balance over the selected period. As reported, the one time fee for a custom loan starts at 0.1 percent. New Kabbage Payments customers start with a rate of 2.25 percent per credit card transaction until June 2020.

Innovating into the teeth of a recession may be a tough proposition, or baptism by fire — only time will tell.