UPDATE: April 2, 2020: Kabbage CEO Rob Frohwein posted a statement on the company's blog on Thursday.
"We officially paused Kabbage lending on Sunday, March 29 as we needed time to restructure our systems and teams to prepare to deliver billions of dollars of aid through the Paycheck Protection Program," he wrote. "This will hopefully begin as soon as Friday, April 3 though process challenges might make this date difficult to attain across the industry. We are always on the side of small businesses and believe strongly that these funds are absolutely the best financial product for them right now. As a result, we made the logical, responsible and ethical choice to convert all our efforts to aid the Small Business Administration in this enormous task."
To read the full statement, click here.
Kabbage cut credit lines without notice for some of its small-business clients last week, several sources, including a Kabbage employee, told Bloomberg.
More than a dozen customers ranging from software consultants to heavy-equipment contractors said they learned their credit lines were suspended upon logging into their accounts.
The fintech has temporarily adjusted its lines of credit and is focusing on supporting the Small Business Administration’s Paycheck Protection Program (PPP), Kabbage spokesman Paul Bernardini said. "Just as manufacturers have retooled their processes to build ventilators and masks, we’re doing the same to reallocate our resources to respond to the national emergency and provide financial products that small businesses need most," he said in a statement to Bloomberg.
Kabbage's decision to suspend credit lines comes at a critical time for small businesses, many of which have had to close their doors because of the coronavirus pandemic.
"This is very bad business ethics," Joydeep Paul, who runs Medserv Healthcare Solutions LLC, an emergency-medical training company in Princeton, New Jersey, told Bloomberg. Paul said his line of credit was cut 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 Friday that the company would temporarily stop making loans, according to Bloomberg.
"As of last night, all lending has been turned off," Frohwein wrote.
Kabbage did not respond to Banking Dive’s request for comment.
As the crisis brings the economy to a near standstill, Kabbage is dealing with the loss of loan origination revenue, as well as losses on the performance of existing loans, according to the Financial Times.
"We securitize our receivables and we are on the hook for loan performance, which is suffering because of delinquencies, because our customers have no revenue, because they are closed," Kathryn Petralia, Kabbage co-founder and president, told the publication. Kabbage’s core customers are businesses with fewer than 20 employees. "They get hit first and hardest," Petralia said.
Kabbage is shifting its business model to focus on helping small businesses access government funds through the PPP, Petralia said.
"Every resource we have as a company is now working on automating Paycheck Protection Program loans," she told the Financial Times.
The Atlanta-based fintech and other non-bank lenders have been pushing hard to be included in the $350 billion program, which is part of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act that President Donald Trump signed into law Friday.
"We should look at all private-sector folks here and say, 'If you can help onboard credit where SBA is the creditor or even originate credit guarantee, this is the time to consider this," Sam Taussig, head of global policy at Kabbage, told Banking Dive last month. "We're looking at days until lots of small businesses face really difficult economic choices."
Treasury Secretary Steven Mnuchin said this week the SBA program is expected to be operational Friday. Guidance for the program has yet to be released.
Meanwhile, Kabbage has had to furlough a "significant number" of its 500 U.S. employees, according to an internal memo seen by TechCrunch.
"We realize this is a shock to everyone. No business in the world could have prepared for what has transpired these past few weeks and everyone has been impacted," Frohwein wrote in the memo. "The economic fallout of this virus has rattled the small business community to which Kabbage is directly linked."
The company is also closing down its office in Bangalore, India, and executive staff members are taking a "considerable" pay cut, according to the memo.