When the pandemic hit in March 2020, it became very challenging for small and medium-sized businesses to survive. As the virus spread and customers stayed home, many companies relied on government loans and grant programs to keep them afloat. One of them was the Payment Protection Program (PPP). Originating from the Coronavirus Aid, Relief, and Economic Security (CARES), the PPP was designed to provide businesses with funds to pay up to 8 weeks of payroll costs, including benefits. These funds could also be used to pay rent, utilities, and mortgage interest. The program has expired, but per the latest data from the US Small Business Administration, it doled out nearly 11.5 million loans worth more than $790 billion. Due to its sheer volume of demand and lengthy procedures, getting a PPP loan approved from traditional banks was often slow and frustrating. Loans would sometimes even get rejected when certain banks like Chase and Wells, Fargo, and JP Morgan prioritized existing customers that had already gone through compliance processes. Those who couldn’t access or secure a PPP loan turned to FinTechs for support. One of them was Kabbage.
What Was Kabbage?Headquartered in Atlanta, Georgia, Kabbage was an online FinTech company that provided funding to SBAs and individuals through an automated platform. The platform would use large data points to determine a customer’s credit score and loan amount. Per Kabbage’s reports, due to its automated technology, more than 75% of its approved loans were processed without human intervention or manual review, which meant that businesses could get loans approved quickly. Kabbage’s approval time from applying to approval was only 4 hours! During the pandemic, Kabbage had processed $7 billion in PPP loans, supported nearly 300,000 small businesses, and preserved an estimated 945,000 jobs across America. This made Kabbage the second-largest US PPP lender by volume after Bank of America. The idea of artificial intelligence (AI) speeding up the process of loan applications attracted customers’ attention and many investors, including SoftBank. Kabbage raised $250 million in venture capital from SoftBank, bringing its total equity funding to $500 million. It also gave a bump to the company’s billion-dollar-plus valuation. Kabbage was an attractive target acquisition for American Express (AMEX). By October 2020, AMEX acquired Kabbage to double down on that sector with a much more comprehensive range of offerings for their clients. While the deal’s financial terms were never disclosed, reports estimated the value of the acquisition to be up to $850 million. However, there was a sudden change of events. In less than a year, Congress opened a formal investigation against Kabbage.
Kabbage Faces Fraud AllegationsKabbage is currently facing investigations into its PPP lending practices from multiple entities: the House Select Subcommittee on the Coronavirus Crisis, the Federal Trade Commission, the U.S. Small Business Administration, and two US Attorneys working in conjunction with the US Department of Justice. Kabbage is being questioned about whether it was too lax in issuing and approving PPP loans that it should have known were fraudulent. An investigation by ProPublica discovered that Kabbage facilitated 378 loans totaling $7 million to non-existent, fraudulent, or fake businesses with names like ‘Beefy King’ and ‘Deely Nuts .’ It turned out that many of these fraudulent applications were tied to farms registered to residential addresses in areas like southern New Jersey and Palm Beach, Florida. Under the terms of PPP, SBAs could obtain loans of up to $10 million that would be forgiven if used for approved purposes such as payroll. Upon investigation, it was discovered that Kabbage had fared poorly in trying to help borrowers obtain that forgiveness. Moreover, the Department of Justice (DOJ) suspects Kabbage improperly included high-earning employees and ineligible expenses in determining how much PPP borrowers were eligible to receive. Kabbage laid some of the blame on American Express for some of its forgiveness delays. It claimed it failed to follow through with promised PPP documentation and forgiveness support after the acquisition. Instead, Kabbage said it had to hire a third party, Biz2Credit, to process and complete its loan forgiveness applications. Until the investigation is complete, forgiveness for nearly 60,000 loans processed by Kabbage is on pause.
A Backlog of Customer ComplaintsSmall business owners described Kabbage’s loan forgiveness process as daunting because it involved endless phone calls, repeated requests to submit more paperwork, and official documents full of errors. When American Express acquired Kabbage in 2020, the deal did not include Kabbage’s existing credit portfolio, which included PPP loans. Instead, Kabbage’s outstanding loans were transferred to a new entity called K-Servicing. This has left borrowers frustrated, confused, and still searching for answers on who’s accountable. PPP customers have tried to contact K-Servicing via social media, emails, and phone calls, but there has been little to no progress. To relieve some pressure, K-Servicing has partnered with FinTech company SmartBiz to help borrowers with their second draws with the help of Customers Bank.
Is It The End?Kabbage has voluntarily filed for protection and relief under Chapter 11 in the US Bankruptcy Court. Under this act, Kabbage is requesting the court to allow them to continue to service PPP loans until they completely wind down. In your opinion, are automated platforms a blessing or a curse? Please let us know in the comment section below. Closing your business can be a difficult choice to make. Not only is it emotional, but there are a lot of administrative tasks to take care of and plenty of opportunities to miss essential details. If you’re looking to close your business, contact us to find out how we can help you move on as fast and easy as possible.
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