UPDATE: April 2, 2020: Kabbage CEO Rob Frohwein released a statement on the company’s blog on Thursday.
“We officially suspended Kabbage loans on Sunday March 29 because we needed time to restructure our systems and teams to prepare to deliver billions of dollars in aid through the Paycheck Protection Program,” he said. writing. “It will hopefully start as early as Friday April 3, although process challenges may make that date difficult to meet across the industry. We are still on the small business side and are confident that these funds are absolutely the best financial product for them. As a result, we have made the logical, responsible and ethical choice to convert all of our efforts to assist the Small Business Administration in this enormous task. ”
To read the full statement, click here.
Kabbage cut lines of credit without notice for some of its small business clients last week, multiple sources, including a Kabbage employee, told Bloomberg.
More than a dozen customers, ranging from software consultants to heavy equipment contractors, said they learned that their lines of credit were on hold when logging into their accounts.
FinTech has temporarily adjusted its credit lines and is focusing on supporting the Small Business Administration’s Paycheck Protection Program (PPP), Kabbage spokesman Paul Bernardini said. “Just as manufacturers have revamped their processes to build ventilators and masks, so too are we reallocating our resources to respond to the national emergency and provide financial products that small businesses need most,” he said. he said in a statement to Bloomberg.
Kabbage’s decision to suspend lines of credit comes at a critical time for small businesses, many of which have had to close due to the coronavirus pandemic.
“It’s very bad business ethics,” Joydeep Paul, who heads Medserv Healthcare Solutions LLC, an emergency medicine training company in Princeton, New Jersey, told Bloomberg. Paul said his line of credit was reduced from $ 22,000 to $ 0. “You just turn it off without saying a word – not an email, not a phone call, nothing,” he said.
Kabbage CEO Rob Frohwein told employees in an email on Friday that the company would temporarily stop giving loans, according to Bloomberg.
“As of last night, all loans have been deactivated,” Frohwein wrote.
Kabbage did not respond to Banking Dive’s request for comment.
As the crisis brings the economy to a standstill, Kabbage faces loss of loan origination income, as well as losses on the performance of existing loans, according to the Financial Times.
“We securitize our receivables and are forced to pay for loan performance, which suffers from delinquencies, because our clients have no income because they are closed,” Kathryn Petralia, co-founder and co-founder, told the publication. president of Kabbage. Kabbage’s main customers are companies with fewer than 20 employees. “They are the first and the hardest hit,” said Petralia.
Kabbage is changing its business model to focus on helping small businesses access public funds through PPP, Petralia said.
“Every resource we have as a business is now working on the paycheck protection program loan automation,” she told the Financial Times.
Atlanta-based fintech and other non-bank lenders have gone to great lengths to be included in the $ 350 billion program, which is part of the $ 2.2 trillion CARES law on aid, relief. and economic security (CARES) that President Donald Trump enacted. Friday.
“We should look at all the people in the private sector here and say, ‘If you can help get credit where SBA is the creditor or even create a credit guarantee, now is the time to think about it,” Sam Taussig , head of global policy at Kabbage, said Banking Dive last month. “We wait days before many small businesses face some really tough economic choices.”
Treasury Secretary Steven Mnuchin said this week that the SBA program is expected to be operational on Friday. The program guidelines have not yet been published.
Meanwhile, Kabbage has had to put a “significant number” of its 500 U.S. employees on leave, according to an internal memo seen by TechCrunch.
“We realize this is a shock to everyone. No company in the world could have prepared for what has happened in recent weeks and everyone has been affected,” Frohwein wrote in the memo. “The economic fallout from this virus has rocked the small business community to which Kabbage is directly linked. “
The company is also closing its office in Bangalore, India, and executive staff members are facing a “significant” pay cut, according to the memo.