With the advent of online business lending services like Kabbage, it's easier for small businesses to get the funding they need to get off the ground. But is it always the best option to go with an online lender like Kabbage? Sure, it is easier to get qualified for Kabbage and it often has lower rates, but it can also have shortcomings when it comes to certain small business needs. Here's a good breakdown of when you should consider Kabbage for a loan and when you should stick with a traditional bank:
Kabbage: If you've been turned down for a loan at a traditional bank.
Traditional bank loans are more difficult to qualify for than Kabbage, so if you've been turned down by the bank, try to get approved by Kabbage. As opposed to a loan, Kabbage gives its users a line of credit that they can borrow against. If your financials aren't strong, they'll give you a lower line of credit, and as you borrow and pay back loans on time, your line of credit will increase. It works well for sites that don't need a huge loan upfront.
Banks: If you need more than $100,000 in loans.
Kabbage only loans up to $100,000 at a time, and it can take some time to actually get approved for that much credit with Kabbage. If you have a large amount of upfront costs and need more than $100,000 to get your business up and running, you will need to stick to the traditional bank route when searching for your loan.
Kabbage: If you just need short-term micro-loans.
Kabbage gives each user a line of credit from $500 to $100,000 based on their credit-worthiness. You can then use that to borrow any sum of money up to your line of credit, with the catch that you must pay it back within 6 months. So if you have a $5,000 line of credit, you can borrow up to $5,000 from Kabbage. If you only need $1,000 here and $6,000 there for expenses, it makes sense to use Kabbage.
Banks: If you need more than 6 months to pay off your loan.
However, if you want to take out larger sums and need more than 6 months to pay them back, it might be smarter to try for a traditional bank loan. Kabbage only allows you to loan money for up to 6 months, so if you borrow $50,000, you have to pay that entire sum back (plus interest) within the 6 month timeframe. This is why Kabbage works better for micro-loans.
Kabbage: If you want to pay less interest.
The good news is, since Kabbage loans have a shorter payback period, they generally don't charge as much interest as traditional banks. In fact, they only charge a varied 1-13.5 percent in the first two months, and then it is a flat 1 percent rate for the next 4 months, which is significantly lower interest than traditional banks charge. If you only need a small loan and can pay it back within the 6-month time period, you can save on interest by going with Kabbage.
Banks: If you want to work within your established bank.
If you already have a business account with a certain bank, there can be benefits to sticking with your bank, especially the ease of getting the loan money and paying it back. While Kabbage offers easy money transfer and payback, it is all done through PayPal, which can be a turnoff for many borrowers.
Kabbage: If you need to get approved fast.
Traditional bank loans can take a while to get approved, and the paperwork involved is usually extensive. With Kabbage, all you have to do is link any of your financial institutions to Kabbage (including eBay, PayPal, Etsy, Amazon or even your traditional bank), and you can be approved for a line of credit in seconds. Kabbage determines the amount of your line of credit based on your financial information, so the more financial sites you link, the better.
Want to know more about Kabbage? Here is a good breakdown of the service as well as a review of OnDeck, another great business loan service.