On this episode Josh speaks with Kathryn Petralia, Co-Founder of Kabbage.com. They talk about what Kabbage.com does and about other aspects of cashflow and lending to small businesses.
Kathryn Petralia is the president and co-founder of Kabbage Inc., a financial services, data, and technology platform that helps small businesses manage cash flow.
Kathryn is a seasoned leader in financial services with more than 20 years of experience across credit, payments, and lending.
Recognized as one of the 100 Most Powerful Women in the World by Forbes, Kathryn helps lead Kabbage to simplify the way small businesses access the capital and services they need to build lasting businesses.
In todays episode you will learn
- Small business optimism
- Importance of cash flow
- Tools for small businesses
- Road to recover
Narrator: Welcome to Cracking the Cash Flow Code where you’ll learn what it takes to create enough cash to fill the four buckets of profit. You’ll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund a growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.
In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.
Josh Patrick: Hey, how are you today? This is Josh Patrick and you’re at Cracking the Cash Flow Code. And today my guest is Kathryn. And Kathryn is the founder of kabbage.com. And I am drawing a blank on her last name and I am embarrassed by this. So, instead of going through a long introduction, we’re going to bring her on and she could tell us her last name, and I can be really embarrassed.
So, Kathryn, welcome to our show.
Kathryn: Thank you so much for having me. I really appreciate it. And don’t be embarrassed. My last name is Petralia.
Josh: Petralia, that’s it. It’s a very nice last name, too.
But, anyway, Kathryn is the founder of Kabbage. And you may not know what kabbage.com is, so she’s going to tell us a little bit about that. And then, we’re going to go into a conversation about how you can get some money into your pocket, if you need to borrow it, and what’s the most effective way to do that if you’re a small, blue‑collar, privately held business.
So, Kathryn, how did you come up with the idea of Kabbage in the first place and what need did it fill?
Kathryn: You know, kabbage has been a technology company from the very beginning. In fact, the idea occurred to my co‑founder, Rob, because he was working with an eBay API that allowed third parties to get access to seller and transaction level data. API being it’s called Application Programming Interface, but it allows two parties to connect and share data.
And so, that was in 2007. He thought, “Wow! That’s really interesting data. I wonder if you could use it to figure out how to make a loan to an eBay business.” And so, that’s how we got our start automating small business loans to folks who sell on eBay. And those were small, very small businesses. And since then, we’ve really expanded to serve all small businesses, as you know, more API’s have become available, and we have better access to data. But we’ve stayed committed to the idea of getting our customers through the process in under 10 minutes, every single time.
Josh: So, do you guys actually loan the money or do you work as a front company for other companies that they actually borrow from?
Kathryn: That’s a good question. There are a lot of different ways to structure companies like ours. There is always a bank behind these loans that have historically been issued by Kabbage or originated through the Kabbage platform. So, Celtic Bank, prior to the American Express acquisition, issued every loan that we made. And we actually took the balance sheet risk, if you will. So, even though we securitized our receivables ‑ meaning we had third‑party investors to give us access to funds that we used to fund the loans, we took the risk for those loans. So, we stood behind them.
Josh: So, what was your process– or what is your process for finding out whether a business is credit worthy or not? And, if a business is not credit worthy, what should they be doing to fix that?
Kathryn: Credit worthy is a really loaded term, I think, for a small business owner. And it is the case in consumer lending as well. But we tend to serve the smaller businesses. So, of the 30 million‑ish small businesses in the US, 90% of them have fewer than 20 employees, 80% have fewer than 10. This has always been the market that we’ve served. We’ve always served the very smallest businesses.
And so, it’s interesting, 100% of our customers, not only through our core lending business that we operated for many years, but also through the PPP program that we ran through it. And, in August, 100% of those businesses had access. And that’s more than 500,000 small businesses through both of those efforts had a bank account, but they couldn’t get a loan from their bank.
And so, the bank didn’t think they were credit worthy but not because they’re bad people and not because they didn’t want to help their customers, but because it’s really hard to figure out how to underwrite very small businesses. We do that based on cash flow. So, we’re able to see, through the data that our customers share with us, how a business is performing. We’re able to see historical cash flow data and to predict future cash flow data. So, understanding what kind of cash flow businesses have has always been really important to us and actually formed a whole new set of tools and products that we launched to help support cash flow management for small business because we realized that businesses were frankly borrowing too much, holding the money for too long, and spending too much on fees. So, our goal was always to help them manage that.
And I think, if you’re a small business owner, one of the most important things you can do is separate your finances. It’s really hard to do. You have a personal credit, maybe card, maybe they use to make business purchases. And if you’re highly utilized on a personal credit card, it can lower your credit score and make personal borrowing more expensive and make it harder to get a small business loan too. So, segregating your business and personal finances is rule number one.
And number two, make sure that you use a tool, use a platform, to manage your accounting, to manage other aspects of your business. There are so many available today. And that allows you to be more organized and to basically present a more organized picture of your finances to a lender.
Josh: And I have something else to add to that, because this is one of my soapbox things, is that I believe so strongly that, if you’re going to be in business, you have to be able to learn to speak the language of business. The language of business is finance. And the most important piece of finance you can look at, if you’re a small privately held business, is your cash flow statement not your profit and loss statement. And the problem I see with most private business owners, they don’t have a clue on how to read their cash flow statement because when you look at it, for the first time, it makes absolutely no sense.
Kathryn: You’re exactly right. And I think, for most small business owners, they get into their business because they love what they do. They love their vocation or maybe it’s a family business, but they didn’t get a graduate degree in finance because that just wasn’t part of the process. And so, I think it’s hard to learn all of the jargon. It’s hard to learn those tools. And I think that’s why we exist because we really want to help those small business owners focus on what they love and spend less time worrying about cash flow.
Josh: But if they don’t worry about cash flow, they’re going to join the 50%, or 60%, or 70% of businesses that aren’t here five years from now.
Kathryn: Well, worrying about it and having to manage it are two different things. And if you have a good partner that helps you manage it, then you don’t have to worry because you know that you’re going to have what you need when you need it.
Josh: So, the 500,000 businesses or so that can’t get a loan from the bank, how many of them bank with a money center bank versus a regional bank or a community bank?
Kathryn: That’s a great question. By the way, the 500,000 is just the customers we’ve served. There are many, many more millions of them.
Josh: There’s 28 million businesses or so in the United States and only 6 million have any employees at all, so it’s a big number and you’re dealing with a small number. I get that.
Kathryn: So, about 80% of our customers bank with the top 10 banks.
Josh: That is such a huge mistake, in my opinion. I mean, they don’t care about you. All you are is a credit score to those folks.
Kathryn: And that may be true also. But, frankly, with smaller banks as well, it’s hard to get a small business loan if you’re very small because the fact of the matter is most of these really small businesses don’t need $5 million. They need $50,000. And it costs, even a community bank, the same amount to underwrite a $50,000 loan as it does a million‑dollar loan or a $500,000 loan. So, they tend to focus on the larger ones. And smaller businesses are just perceived to be risky.
Josh: Well, that’s also true. I live in Vermont and all businesses, basically, except for about 30, are your size customers. And we have several community banks. They actually specialize in loans under $100,000. And that’s what they do really well. But the truth is, most people get stuck in the money center bank syndrome where you’re a credit score and that’s all you are.
Your type of service, if you’re actually doing cash flow lending, which is what I think banks should do all the time, you’re putting yourself in a way different position than most people. So, it’s really important for our listeners to know what cash flow lending is and what type of results do they need before you’re willing to loan them money. So, could you talk about that a bit?
Kathryn: Well, a big part of it is longevity. So, we want to see that you’ve been operating your business for a year. But if you’ve been operating longer, having visibility into that data is really useful for us. But getting a spreadsheet doesn’t help for us. We really need to see real‑time, third‑party verified data. And we can see that in your checking account. And so, what we can see is the dollars coming in, and the dollars going out, and the delta between the two. And that is what we need to understand what you can really accommodate. How much of a loan really makes sense for you, based on that net number and what we predict that number to be going forward.
So, you can get that data from a lot of places. You can sometimes see it in your ledger. You can sometimes see it in your accounting platform, but you can definitely see it in your primary business checking account.
Josh: Yeah. My father used to call that checkbook accounting. We used to be in the foodservice vending business, which was a cash business for all intents and purpose, and if the checking account was growing, you were doing well. If the checking account wasn’t doing well – growing, you had a problem. It was really that simple.
It is true in a lot of businesses. If they just look at what they’ve got, you know, for book business versus what they have for receivables and cash, they’re going to know what the future looks like for them pretty easily, it seems.
Kathryn: That’s true. And what’s also really interesting is the use of funds is, in part, understanding what you need to do with the dollars. And there are a lot of different examples, in a lot of different industries, but most of our customers have tended to use it for growth opportunities. Maybe you’re investing in a new location, or maybe you’re investing in an improvement to your business establishment, or maybe you’re investing in marketing to drive new traffic.
I love the example of construction because it just demonstrates a really important cash flow gap. So, most construction businesses are– especially the smaller ones, they’re doing work, and they’re hiring people, and buying materials before they get paid. And so, the issue is, they really want to make sure they have the best people working on their teams and, if they don’t pay them, they can’t keep them. So, they have to have funds to manage paying all of those bills before they’re going to get paid by, you know, the folks for whom they’re doing work. And so, there’s always this cash flow gap in construction. But, if you have access to that capital, then you can say yes to a larger job, and you can invest more in those materials and in those folks to work on your teams so you can continue to grow your business. And even though that sounds like managing through a shortfall, you’re really managing for growth.
Josh: Well, you know, as I’ve always said, and this is one of my mantras is growth is expensive because you have to buy material, you have to have financial receivables. You have to finance your inventory. You often have to finance bodies – people working for you, before you really need them, so they’re available. When you have the growth, and as you go through the stages of growth, you need other people in your company who is going to take six months to a year for them to be making you any money and you have a way to finance that. So, when I was in the world of trying to borrow lots of money for running my business, I found out really quickly that the bank would love to loan me money but not 100% of what I needed. And I assume that’s the same with you.
Kathryn: It’s really hard to know what someone needs. We don’t actually say, “Hey, tell us how much you need and we’re going to get back to you with a number.” We literally look at the data and make a determination about what the access amount should be.
I don’t know the answer to the question. I mean, obviously, a lot of customers call us and they say, “Hey, could I have a bigger line? Could I get more access?” We hear that a lot. But, you know, sometimes, all of us have our eyes somewhat bigger than our stomachs. And so, I think we all have really grand ambitions and we want to be able to invest in them, but our job is to make sure that people are going to be able to satisfy that obligation. That’s really important. You know, we have an obligation to our customers, to make sure they can do that.
Josh: So, when you do your loans, are you doing mostly lines of credits or you’re doing term loans also?
Kathryn: All lines of credit.
And so, it’s kind of a weird structure because it started because we were serving eBay businesses. And what we knew is that they were generally using the capital to buy inventory, so they had a short‑term return. So, what we did was to create a line of credit, but every loan is its own installment loan, so to speak. So, they all amortize independently. And what we like about that and what our customers like is we can predict them exactly what their fees are going to be over the duration of the loan. So, we’ve kind of stuck with it because people seem to like it.
Josh: So, what kind of interest rates do you guys charge?
Kathryn: Calculating that is interesting, because a lot of our loans are under 12 months. And so, that sort of artificially inflates the APR. So, historically, our average effective APR has been in the low 30s. You know, obviously, there’s a range there but, if you think about the cash that the fees that people are actually spending, it’s much lower than you might see with traditional credit cards. APRs are really hard to calculate for shorter term loans, but we disclose that. Every single time our customers borrow, we tell them exactly what the total dollars are they’re going to spend in fees, how much they’re going to pay every month in fees, and what their effective APR is for borrowing.
Josh: Mm hmm. I assume American Express is now providing the capital for your loans for you guys?
Kathryn: We have not launched yet with American Express or re‑launched, if you will, that product. So, we’re still in the process of working that out, and how it’s going to work, and who we’re going to serve.
Josh: I just want to pivot to this for a second because I think it’s a really interesting thing. Before we started recording, you said, “Well, it’s hard for me to get used to having a boss.” And I have coached a few hundred people selling their businesses through the process of leaving and moving through what we call sellers remorse. And often, it happens, the founder or the person who owns the business, when he sold it, they find out that they really can’t stay there after they’ve been sold because they don’t work well with a boss because they never had one before. Are you finding a challenge with that or is that something you don’t want to talk about?
Kathryn: No. I’m happy to talk about it.
I’ll tell you exactly how it manifests itself is weird. And then, I want to talk a little bit about American Express because it’s just such a lovely company. We were in a meeting my co‑founder, Rob, and I and we were in a meeting with our boss. And it was kind of clear that the meeting was over and Rob texted me. He was like, “I really want to end this meeting. I think the meeting’s over.” But it’s not my meeting. I can’t end it. So, like not even being able to end a meeting, you know, is kind of a funny story or a manifestation of that.
But, I have to tell you, we’re so fortunate, American Express has really shared values us, just caring about the customer, caring about one another as employees. They’re just such a strong, thoughtful, really smart, and caring organization. It’s not a shock exactly. I’ve been an American Express card holder since 1989. I was four when I got that card. But– no, I was 18 years old. So, I love American Express as a customer. And I love it even more as now, an employee. They’re really a lovely organization.
Josh: Cool. I’ve heard great things about American Express over the years. And they are an incredibly well‑run company or they appear to be anyhow. So, their reason for buying you was–?
Kathryn: They have a goal of moving, you know, beyond the card, first of all. As you know, American Express has historically been focused on card. And, also, this notion of digital first and digital transformation is important to them as well. And we already had a platform that could help them serve small businesses in a way that’s truly automated, that allows them to expand the customer base that they’re serving and serve them more effectively. I mean, create a better user experience in the process.
So, they already– American Express serves as many small businesses in the US as any other financial institution, you’ll see. And so, it’s an important constituent to them. And this allows them to continue to serve those customers even better.
Josh: So, when you were in the process of deciding who your buyer was going to be, did you talk to some of the money center banks also?
Kathryn: We’ve been around for 12 years. We’ve talked to everybody over the years, multiple times. So, that’s certainly been a conversation we’ve had. Yes.
Josh: Yeah. It seems to me that the money center banks need to open up a separate bank that deals with small business, if they actually want to serve that population, because they do a really terrible job, in my opinion, of– it’s almost universal. If I have a client that comes along, who happens to be at a money center– and, by the way, for those who are listening, money center are the 10 biggest banks in the country like Citibank, and Bank of America, and Wells Fargo, who behaves so well.
Kathryn: You can say a lot more about that than I can.
Josh: Well, I can’t resist it, frankly. But–
Kathryn: It is irresistible.
Josh: But the truth is almost 100% of the time we move them away from those banks, because they don’t serve their needs. For some reason, small businesses think they need a big bank, when they could use a tiny community bank and never get past their lending limit. And I’m assuming the same is true with you.
Kathryn: Well, I think a lot of customers come to us because they aren’t getting what they need from their bank. And it’s funny, that’s one of the reasons we launched, in August, a checking account for small businesses. You can come to the site. Sign up for a checking account. You know, get access to it in less than 10 minutes with a 1.1% APY and no overdraft fees.
Well, we learned. I didn’t even know this about small businesses and about checking accounts in particular, but a lot of our customers were forced to go to check cashers to get earlier access to their funds, because the banks were holding their deposits for so long and they needed that cash flow. It was important to them. And that just shocked me that they would spend 20% of the face value of a deposit because they really needed the capital. It’s not because they’re desperate. It’s not because they’re subprime. It’s because they’re trying to run a business. And so, we wanted to provide a service to them that would help them avoid that.
Josh: Well, that’s a huge profit, you know, method for the large banks because they’re pretending we’re back in 1978 and 1980, when it took three to five days to clear a check through the Federal Reserve System. Now, it takes like 12 seconds so.
One more question. We’re almost out of time because this is something that just occurred to me is that, where is the blockchain fitting in, which is Bitcoin and Ethereum and all the cryptocurrencies, with your thinking? More on the administration side lending than the currency itself – the blockchain, as a methodology, not the cryptocurrency part of it.
Kathryn: So, I am a fan of a distributed ledger. I think the idea of reinventing the ledger is fantastic. I’ll tell you the first time I ever saw, this was many years ago. And we share a common investor with Ripple. And I saw a Ripple demo. And I was like, “This should put like Western Union out of business,” being able to instantly move funds between institutions around the world and settle at the end of a day without actually moving anything. I thought it was, you know, incredibly clever and disruptive. So, I think that there’s a lot of value in the blockchain. There’s a lot, you know, smart contracts and being able to, you know, the public encryption– I feel like there’s a lot of value from the ledger perspective in financial services.
The cryptocurrency itself, we can talk about that another time. I’m not super bullish on that.
Josh: Yeah. Well, who knows what’s going to happen? I mean, bought a little bit just to see what’s going to happen for fun. And, frankly, I don’t plan to touch it for 10 years. And we’ll see what happens 10 years from now.
Kathryn: Someone gave me like a quarter of a Bitcoin, probably eight or nine years ago, and I don’t know where I put it. I totally lost it. And then, it went up a lot. And it was like real money. At one point, I was like, “Damn it. What did I do with that?” Anyway.
Josh: Well, it’s– the thing that I think is important for the businesses who are in the traditional ledger, they need to be thinking about what their next act is going to be, specifically the title insurance companies. You know, title insurance is going to be a thing of the past in 10 years. I mean, it’s going to still exist but it’s not going to go through the way it does. It’s going to be on the blockchain. There’s no reason for it not to be and it’s simple, easy, fast, and way cheaper.
Kathryn: I agree.
Josh: At any rate, that’s my thing.
So, Kathryn, this is really interesting. I appreciate you being on. I really get people who have founded what we call unicorn companies, which are companies have become fabulously successful, find a huge buyer. Hopefully, you got billions of dollars for your business. I might look it up someday. So, I appreciate you spending time with me.
How do folks find kabbage? Are you interested in talking to anybody about your journey? If not, that’s fine also.
Kathryn: As I said, I’m pretty transparent. I’ll talk about just about anything. You can find us at kabbage.com, K-A-B-B-A-G-E.com, which I have a funny story about why we called it kabbage, if you want to hear it.
Josh: Sure. I love to.
Kathryn: If you Google cabbage with a C, you’ll see the first definition is a vegetable. The second one is money. It’s a dust bowl era metaphor euphemism for money, that is cabbage with a K. And so, cabbage with a C .com was $75,000 in 2009 and we didn’t have any money. And cabbage with a K was $1200, so we went with the K.
Josh: Okay. Well, that makes a lot of sense to me. I actually love the name kabbage.com. I think it’s a great name. And I think that you guys are fulfilling a really important need in the private business world, especially that lower end where, you know, the SBDC which is part of the Small Business Administration tends to spend their time.
I have two things I would like you to do. The first, I should’ve done at the beginning of the show, and I keep forgetting to do which is, if you’re listening to this show right now, please go to wherever you listen to podcasts and leave an honest rating and review for us. It’s a really, really important thing.
And the second thing I would like you to do is that we’re talking about innovation, essentially, today and kabbage is an incredibly innovative company. It was an incredibly innovative concept and being rewarded really well for that. I put together an infographic on systematizing your innovation process. They have a strong belief that innovation doesn’t come from above, it’s something that’s a system. And, if you can systematize your business, you make it ordinary in the way you work. And if you’re not innovating, internally and externally, you are going to have problems in your business down the road. I will promise you that. So, to get it, it’s really easy. You go to www.sustainablebusiness.co. That’s .co and not .com, /innovation – www.sustainablebusiness.co/innovation.
And this is Josh Patrick, and we’re with Kathryn Petralia. You’re at Cracking the Cash Flow Code. Thanks a lot for stopping by. I hope to see you back here really soon.
Narrator: You’ve been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around 100 years from now?”
If you’ve liked what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at firstname.lastname@example.org.
Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.