Kabbage Furloughs workers warn of lack of cash
As COVID-19 undermines consumer demand across all kinds of verticals, and small businesses bear the brunt of a sudden loss of revenue, businesses that lend to these SMEs are also feeling the heat.
The most immediate victim appears to be Kabbage, which, according to a memo seen by TechCrunch, will lay off a “significant number” of its US workforce, which has 500 employees.
The company is also reportedly in the process of “completely” shutting down its operations in Bangalore, India. The executives of the company will suffer a “considerable” pay cut.
A Kabbage spokesperson declined to comment on the report, but the company’s co-founder and CEO Rob Frohwein wrote in the note as follows: relayed by TechCrunch that “we realize this is a shock to everyone. No business in the world could have been prepared for what has happened in the past few weeks and everyone has been affected.”
The executive said many small businesses in the United States “won’t have the cash flow to go 10 days without income … and we’re way past that window already.”
Ironically, Frohwein wrote in a blog post just a few weeks ago that a three-week global quarantine would be one way to fight the pandemic.
“It would mean sacrificing the lifestyle we’ve grown used to for about 21 days and it would probably take up to two weeks to put the plan into action,” he wrote. “Apparently three weeks is the maximum time it takes for the virus to manifest itself and, therefore, to begin treatment and identification of anyone else who may have come in contact with the infection.”
Yet the urgency and speed of Kabbage’s latest moves comes even as the US government’s $ 2 trillion stimulus package allows a number of entities – FDIC banks, credit unions and, more specifically for this discussion, FinTechs like Kabbage – to do ready small businesses. In addition, the Small Business Administration has a million claims on its proverbial desk for disaster relief loans.
We note that when applying for cash loans, companies usually demonstrate an operating history and income and cash flow, which of course can help determine creditworthiness.
The lack of revenue, which translates into cash, likely closes at least some channels for lending. And loans that are already “on the ground” so to speak (small businesses can get loans of up to $ 250,000 and where Kabbage fees vary between 1.25% and 10%), may be the ones that face a slippage in bad debts. The availability of capital may also be less robust than it once was.
In an attempt to offer at least high-level compensation for small businesses, FinTech said last week it had launched an online hub called HelpSmallBusinesses.com through which consumers can purchase gift certificates from SMEs (each certificate can cost between $ 15 and $ 100).
On Monday, the company said it was expanding the program, with several U.S. companies joining the effort. Kabbage has indicated that he will not benefit from the effort, with other companies participating – including Alibaba.com, Gusto, Lendio, Nav, UPS and several others – making similar promises.
In a statement announcing the expansion of the program, CEO Frohwein said there was a “unique opportunity” for businesses to come together and help those who may be hardest hit by the complete destruction of many. of their income streams right now.
But for FinTechs like Kabbage, a real test is underway. Underwriting and working with lenders such as Celtic Bank of Utah (which issues the loans) only work if companies are in business long enough to tap those loans.
Kabbage also has a custom lending feature through Kabbage Payments – and as noted in this space last month, SME can choose repayment terms ranging from three to 45 days. When the loan matures, customers can either pay it off in full or allocate a portion of the Kabbage payments to the balance during the selected period. As noted, the one-time fee for a personalized loan starts at 0.1%. New Kabbage Payments customers start with a rate of 2.25% per credit card transaction until June 2020.
Innovating in the teeth of a recession can be a difficult proposition, or baptism by fire – only time will tell.