Last year, small business owner Walter Schmidt faced a common entrepreneurial dilemma: His Internet retail startup, LeatherPaKs, was at a financial crossroads.
Not because of stagnant sales – growth was consistent, reaching $745,000 in annual revenue within two years – but resources remained tight. The firm’s cash flow barely covered the supplier costs. More investment was required to break the cycle of treading water for this New Jersey-based company.
Then Schmidt learned about Kabbage, an Atlanta-based company that offers quick and simple capital advances to e-commerce entrepreneurs. Schmidt was able to get $75,000 for much-needed website upgrades and holiday advertising.
“It enabled me to do things I wouldn’t have been able to do,” he says. “I [consequently] did 30 percent better over the holiday season this year  than the previous year.”
The sharp sales upturn allowed Schmidt to pay off the advance and make further improvements. Now, his two-person operation plans to add an employee or two.
“Eventually I’d like to start making my own bag designs and styles,” he says. “I’m also adding more website functionality this year.”
Unconventional approval process
Kabbage hopes experiences like LeatherPaKs’ will attract retailers because of the model of fast access to capital and its speedy approval process.
Instead of a credit score, a loan officer’s benchmark that draws on an individual’s credit history, Kabbage considers many additional factors. Sales history on e-commerce sites, for example, and even shipping volume data from Schmidt’s UPS account, were key eligibility indicators.
“We find greater value in examining a business’s potential through other non-standard data,” says Marc Gorlin, chairman of Kabbage. “The number of packages a retailer ships helps indicate how well it’s performing. If we see a steady increase in volume, we know that it’s growing.”
Earlier this year, Kabbage and UPS formed an alliance for small businesses, with UPS Capital®. Now UPS customers can direct UPS to share their shipping history with Kabbage as part of the approval process. From there, Schmidt didn't have to wait long for an answer.
“The money showed up in PayPal two minutes later,” he says, with his approval confirmed quickly after submitting the application.
Instant capital can be crucial in an industry where transactional timing is important. “Sometimes you just can’t wait 30 days for funds,” Schmidt says. “What if I see a great deal from a supplier? If I have to wait, it could be too late – I wouldn’t need the money anymore. Plus, many retailers have seasonal needs.”
The critical lag between a retailer’s cash needs and a traditional lender’s exhaustive process to provide it, says Gorlin, has created an opportunity for companies like Kabbage to gain a foothold with online retailers.
Soaring Internet sales
Online holiday sales hit $49.7 billion in 2011, compared with $43 billion in the fourth quarter of 2010, according to comScore, Inc., an online research firm. That growth marked the ninth consecutive quarter of year-over-year growth and the fifth consecutive quarter of double-digit growth rates. ComScore also noted that U.S. e-commerce spending reached a record $161.5 billion for all of 2011, a 13 percent increase over 2010. Analysts expect Internet sales to reach $278.9 billion in 2015.
“Access to working capital for small businesses is fundamental to the country’s economic recovery,” says Alan Gershenhorn, UPS chief sales, marketing and strategy officer. “This alliance with Kabbage is an example of how UPS Capital can help small businesses gain access to working capital they need to grow their business. We’re looking forward to extending our alliance with Kabbage and the thousands of e-commerce companies it supports.”