The Kabbage Loan Process and the Impact to Your Credit
Kabbage has developed a reputation for being a provider for short term loans within the alternative lending universe, often for those who may not be able to secure a loan through a traditional lender. To provide the speed and simplicity of service the Kabbage system is highly automated. Loans can usually be approved within three to five days. But beyond the loan itself there are long term issues to consider
- Can your business afford the payments and fees?
- What happens if I can’t pay my loan back?
- How does this loan impact my long-term credit?
Higher Cost Loans
To service the sector that it does Kabbage charges higher rates than you would find through a traditional lender. Depending on the type of loan you receive these rates can range from 24%-99%. The rates are captured through Kabbage’s fee system and are front loaded, meaning the fees are higher in the first few months than in the latter part of the loan. This means a higher financial burden as a monthly cost for a few months and means the benefit of early payback is not as dramatic as with other lending instruments.
Factors Considered by Kabbage for Loan Approval
Many traditional lenders may “stop at the water’s edge”, so to speak, when encountering a questionable or bad credit score. While there may be other factors they will consider, a bad credit score can sink your chances for a loan regardless of the strength of those factors.
Kabbage looks at credit score but also uses the health of the business in its determination for approval. The automation of the Kabbage system makes it easy for them to synch with your checking account, accounting software, Amazon, eBay, Square and many other programs within your business to provide them with an overall picture of your business’ health. The more accounts and systems synched, the faster the process and more automated the experience.
The assessment of so many other factors can often help mitigate bad or questionable credit. You will pay higher fees, but your chances of receiving the money are greater than they would be through a traditional lender. However, it is important to note that part of the process does involve a credit check.
During the third phase of the application process you are asked permission for Kabbage to pull a credit check. This is a hard check on your credit and can have a five point or so downward dip for about six months or so. A hard check is used to determine credit worthiness and is a permanent part of the credit record. Future lenders will be able to see the hard check when considering funding future loans. This should be kept in mind when applying for a loan or line of credit with Kabbage. Your chances for approval are greater than with traditional lending but you pay higher fees and you still have a hard credit check.
There are pros and cons to consider when applying for a Kabbage business loan or line of credit:
- Loans are usually approved within three to five days and funds are available quickly as well.
- The process is simple and highly automated including automated monthly payments.
- They do not charge origination fees and for some types of loan, such as a line of credit, they do not require a personal guarantee to secure the funds.
- Kabbage will do a hard credit pull when you apply.
- They will file a blanket UCC lien on your business when approved. This means that in the event of non-payment, Kabbage could seize assets and collateral to satisfy the debt.
- Denial requires a six to twelve month waiting period for re-application.
The Future of Your Credit
No one wants to take out a loan. And when the choice is made to do so, fewer still want to take out an expensive loan with high fees and high rates. But to move forward, many businesses at times must borrow. For newer businesses and startups this can be a particularly big headache but also a crucial time in the life of a new business. A crucial time to weather a crisis or shortfall in the early stages; a crucial time to develop relationships to better build barriers to future shortfalls; and a crucial time to build your credit and the credit of your business to ensure that pathways to traditional, and less expensive, lending open down the road. There are two key things to understand when pursuing a short-term loan with Kabbage on these points:
- Kabbage will occasionally issue a second loan or line of credit. However, this is done only when someone has already paid down a portion of the current loan. Given the high rates of the Kabbage fee system a second loan, even if obtained, could be too expensive. Reviewing all alternatives for funding before securing a short-term loan through Kabbage is advised to allow maneuvering room down the road in terms of cash flow to service debt and build your credit.
- Kabbage does not report to personal and consumer credit bureaus. While this may sound like a relief for a few, it is a net negative for most borrowers. If a borrower has had questionable or bad credit previously, then on time payment and payoff of a loan or line of credit would be an asset to building or rebuilding credit. However, since Kabbage does not report to credit bureaus, the borrower could find themselves needing a longer-term business loan down the road with no track record recorded for the payback of the Kabbage loan.
As with all things, the best use of borrowed money will depend on each individual case. For many businesses trying to survive or wait out a specific issue, it may be a perfectly reasonable option. For others, it is a necessary path until they can find better footing for the business through increased sales and profitability. However, as much as “need it now” comes into play, careful consideration should be given to the impact of the loan on future credit, both for the hard pull on the front end and the lack of reported loan payback performance on the backend, to help build a stronger credit score long term.