Rob Frohwein on the Growth of Kabbage, from Lending to Payments

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Rob Frohwein is co-founder of Kabbage, which provides business lending and related financial services — most recently invoicing — for small- and medium-size businesses.

You recently launched an invoicing service, something other companies, including PayPal and Intuit, offer. Why?

We are different. Invoicing is highly competitive, and we have all the features and functions anyone would expect. The more important part is how we created the payments aspect in an effort to shift the invoice from the middle or bottom of the pile to the top and get businesses paid faster. 

So this is more than electronic invoicing?

We are creating a cash management service that allows them to hand over business management to Kabbage, tasks that cost them 40 to 60 hours a month. That allows them to spend more time on their business or with their family or on hobbies and achieve a higher ROI. We are not doing tax and accounting. 

Is this different from PayPal or Square, which are offering small business lending based on the flows of receipts through their platforms?

“WHEN A SMALL BUSINESS OWNER GETS COMFORTABLE WITH THE FACT THAT THEY CAN TURN THE SYSTEM ON, AND IT WILL ANALYZE CASH FLOW AND TAKE ACTIONS IN A WAY THAT IS IN THE BUSINESS’S BEST INTEREST, THAT IS THE HOLY GRAIL OF WHAT WE ARE TRYING TO ACHIEVE".

We realize the big payment platforms that have gotten into lending have a relatively clear view of money coming in, to the extent that those transactions happen over their technology, although small business owners often use multiple payment systems. But they don’t have a strong understanding of outflows. Business owners can connect Kabbage to key data, receipts of cash, payment processors, or receipts in the bank account, account data we have access to, as well as what we see through sources like Quickbooks. We often see cash flowing out in the bank account, so we get a pretty good view of both sides of the account. We can predict when their cash flow will ebb, and we can inject capital when there is going to be a drop below a specified level.

So you haven’t created a standalone finance app?

We are not looking to replace them with silo products that don’t talk to each other, which small businesses often have. These products and services should be highly integrated so we can perform a treasury management function, which is not a term a lot of small business owners have a lot of experience in. They do know they need positive cash flow on a monthly basis for business expansion and personal expenses. We can help them focus on their business and build great businesses, and allow us to provide these services.

Are you using artificial intelligence to do this?

The definition of AI has been broadened so significantly that it now includes math. I define it as leveraging big data sets to not only do a calculation that might not have been possible, but also allow systems to take action in new ways based on that data: automated treasury management services. I see us being the autonomous tech helping small businesses manage cash flow.

You expect business owners to turn over their finances to an algorithm or two?

When a small business owner gets comfortable with the fact that they can turn the system on, and it will analyze cash flow and take actions in a way that is in the business’s best interest, that is the holy grail of what we are trying to achieve.

You seem to think finance is the part of business that most owners want to avoid.

Having to deal with financial management is the most important and most painful part of running a small business. They love their business, but managing the business finances is the part they dread.

Will this provide a level playing field with large businesses?

Forget the level playing field — how do you get them to the step above? Through customer service, the vision, and the dreams and creativity. But often a small business can’t spend a lot of time doing those things because they are stuck in the mud of finance.

Do you provide international reach?

We have a partnership with Alibaba.com, which is a great partnership that has grown really rapidly. They are 20 years old, but they move really rapidly, and we are well aligned. U.S. small businesses that purchase supplies or inventory through Alibaba.com — mostly from Chinese manufacturers but also from several other countries — when you check Pay Later on Alibaba.com, that is powered by Kabbage, just for U.S. businesses. (It provides up to $150,000 in credit.)

What are Kabbage’s interest rates? Nerdwallet says the APR ranges from 24% to 99%.

We do have a range, and with Alibaba they can go down to single digits, around 6% or 7%. We stay connected to the individual small business’s data, which allows them to graduate to better rates and access more capital as their business grows. Many of our customers have been with us for the eight years we have been in business. Some, if they need more than $250,000, which is our upper credit limit, would go to another provider to access more capital.