Secrets to a Successful Loan Crowdfunding Campaign for Your Business

Ever wished for a deep-dive into the world of crowdfunding? This is your golden ticket! Join Fundid's CEO, Stefanie, as she navigates through the intriguing world of crowdfunding with Topiltzin Gomez, Head of Capital Strategies at Honeycomb Credit. We’ll give you an insider's view on everything from donation crowdfunding to equity crowdfunding, the 2012 JOBS Act, and much more. We'll even touch on the vital role played by regulatory bodies such as the Financial Industry Regulatory Authority and the Securities and Exchange Commission in ensuring investor safety on crowdfunding platforms.

This conversation has been edited and condensed for clarity.

Stefanie:

Today I'm chatting with Topiltzin Gomez, the Head of Capital Strategies at Honeycomb Credit, about crowdfunding. Honeycomb is a loan crowdfunding platform for small business owners. Let's dive in. And my first question for you, which I feel like it's still a new topic, even though it's been around a long time, is what is crowdfunding?

Topiltzin:

So crowdfunding is basically where you are aggregating a whole bunch of small contributions to get to a big goal. So many of us are familiar with donation crowdfunding. right, we might see GoFundMe's for disaster relief or to help someone who's down under luck, but that's just the surface of crowdfunding. There are all sorts of ways that businesses are using crowdfunding, ranging from donation crowdfunding to loan crowdfunding to equity crowdfunding and everywhere in between. It's really all about just turning your community into a source of capital.

Stefanie:

Okay, that's interesting. Where did this start? Has this always been around? And then the big thing that flashes in my head when you say that is do you have to be a candidate to participate in crowdfunding?

Topiltzin:

There are many different types, as I explained, but when it comes to donation crowdfunding or reward crowdfunding, think about a platform like GoFundMe or Kickstarter. It's really easy for a business or a person with an idea to set up these campaigns and then receive contributions from anyone on the internet or anyone in their community, so there are no new requirements there.

We've had Kickstarter and GoFundMe for quite a while now, but there's this cool new page in crowdfunding that we've started seeing over the past six years. It's called investment crowdfunding, where it's not just people donating money, maybe in exchange for a t-shirt or a board game; it's people actually investing in securities alongside their everyday people. So regulation crowdfunding space became available in 2016 after the 2012 JOBS Act made it so that people could publicly solicit investment from both accredited and unaccredited investors.

So this has really opened the floodgates and it's made it possible for hundreds of companies to publicly solicit equity investments if they're trying to develop their app, or publicly solicit debt investments if they're trying to open up a new brick-and-mortar location.

Stefanie:

Interesting. Okay, so let's make sure I have this straight. Kickstarter would be considered a rewards crowdfunding platform because it's like you make a $500 donation and maybe what you did was pre-purchase the product or you got t-shirts, but you actually got something in exchange for that money, which is what makes it rewards. Abd investment crowdfunding is like taking actual stock or providing a loan or something like that in the business and you're not necessarily getting a good certain services in exchange for that.

Topiltzin:

Yes, the good or service that you're getting in investment crowdfunding is you're buying that security, whether that's an ownership stake in the business or extending debt to a business.

Stefanie:

Interesting. So you said something about 2016 changing the game on this, tell us more. So before 2016, this wasn't possible, and now it is.

Topiltzin:

Correct. So what really changed the game was in 2012. Remember, back in 2012, we were facing a really slow recovery from the recession of 2008. So what ended up happening was that President Obama and Congress passed this bill called the Jobs Act, which had all sorts of provisions to encourage economic activity. One of them was allowing for investment crowdfunding to exist, because we were noticing that a lot of investment was flowing from California to New York, but very little investment or even bank lending activity was happening in smaller cities across the US or in smaller communities across the US.

So the thinking was well, if the venture capitalists and the banks aren't necessarily going to be flocking to invest in these communities, maybe people could jumpstart some of that economic activity. So they made it possible for these investment crowdfunding platforms to exist, where, if a business wanted to raise funds, they could do it from both accredited and unaccredited investors. It's very similar to issuing stock, but it's something that can happen publicly with a lot less legwork. right? Think about it as going public but in a more private sense.

Stefanie:

And then I just want to level set here for my own brain to process what you said. It allows for accredited and nonaccredited investors to participate. And to clarify, an accredited investor is generally a high-net-worth individual. They have like $250,000 in income or something in the last year. You could Google it online, and that's what makes an accredited investor. But this allows nonaccredited investors. How does that work? Because I think in venture, you still have to be accredited, right?

Topiltzin:

Yes, so it is specifically written into the Jobs Act that these types of platforms can allow for both unaccredited and accredited folks to invest in these businesses.

Stefanie:

So it's tied to the platform, like how you do it. Oh, that's so fascinating. I would have never known that.

Topiltzin:

Yeah, so all of the investment crowdfunding platforms are regulated by the financial industry regulatory authority and the Securities and Exchange Commission, which means that all of them have to meet certain due diligence guidelines, and promote certain practices to make sure that investors are investing in this new type of asset class safely right, because every time a business is opening themselves up for investment, there's always some associated risks. So we're kind of playing the role of the intermediary, making sure that these investments are not fraudulent, that they are vetted and somewhat safe, but still always communicating to investors the risks associated with making these investments.

Stefanie:

Interesting, and so Honeycomb, you guys are in the investment crowdfunding space. It sounds like there are two main plays here. You're either investing on this crowdfunding platform to facilitate a loan, so debt or take equity stakes in the business. Is that right?

Topiltzin:

That's right. In investment crowdfunding, that's the two most common types.

Stefanie:

Okay. Can you tell me more about the two different types and how people select it or why? As a small business owner, I'm like I would have no idea how to choose between the two.

Topiltzin:

So I think that the fundamental question is are you looking for a debt investment or are you looking for an equity investment? When it comes to equity, you are selling a stake in your business, so you might be selling 10% or 20% or maybe even 30% of the businesses assets shares, and then, at some point, you will be receiving a cash infusion for that stake that you've sold.

So we see a lot of this in the venture capital space for high-tech, high-growth startups where, for example, Facebook in the beginning of its existence, was not making any revenue at all, but it was bringing together millions and millions of people. But they need to keep the lights on so that what they did was they sold shares of Facebook in order for them to keep the lights on. In exchange, right, these venture capitalists got to own a share of this growing company And then, finally, when the company was able to go public, and enter the public stock market through an IPO, they were able to cash out a pretty big check.

So what that looks like for a brick-and-mortar Main Street business owner or a professional services firm is you, too, can do this. You would be selling off a part of your company and when there is some type of exit or, for example, you might get bought by a bigger company. Think about it If you were in the brewery space, for example. It takes a lot of capital to launch that brewery, so this could be a way to raise some of that capital.

And then, once you know, three or four years from now, you could maybe sell your brewery and your investors would be able to participate in the upside of that sale because they own a part of that company. On the debt side, there are many reasons why a business would not want to take on equity investors. Many times, equity investors might direct what you do with your company. They might have a say or a voting share, and many small business owners want to run the business their way. Moreover, there's not always going to be a guaranteed exit. Sometimes you might run a coffee shop, and there might not necessarily be a buyer for your coffee shop whenever you're looking to sell.

So these are very hard businesses to sell. Sometimes you might just sell them for their assets, not necessarily for their brand value or things like that. So what ends up happening is we're seeing a lot of businesses that are reaching this point in their journey, where things are going well, or they're progressing at a steady clip, but they're running up against a bottleneck, right? Whether that is hey, I am a pickle maker, and I am hand slicing pickles, and I cannot sell to grocery stores because I'm so busy hand slicing these pickles. Maybe then is the time to purchase that big, expensive piece of equipment, and you know that when you do, you might be able to generate more revenue. So debt might make sense, right? The proceeds of that investment will help cover the debt that you're taking on.

Stefanie:

That makes sense, cool, and so debt crowdfunding or loan crowdfunding, that's going to be like the most typical path for a small business owner. And it just kind of works for them in general, especially if they can't get bank financing or maybe they just like this path anyways. So, with that in mind, what should a small business owner who is considering needing capital, what should they think about when, before they pursue this path, if they were going into crowdfunding?

Topiltzin:

One of the key questions I often ask small business owners is: What's the bottleneck in your operation that additional capital could solve? For instance, are you a restaurant owner still hand-slicing pickles when an expensive machine could do it faster and more efficiently? Or perhaps you operate a food truck and are missing out on revenue because you can't be at multiple events simultaneously. In such a case, investing in a second food truck could be beneficial.

The goal is to accurately identify your bottlenecks and time your debt capital infusions to address these issues effectively.

For many businesses, another common bottleneck is high-interest debt taken on at the start of their venture, such as credit card debt or online loans. Here, refinancing that debt using a more patient debt source, such as loan crowdfunding or bank loans, could be a viable solution.

The Twist of Loan Crowdfunding

Crowdfunded loans offer a unique twist - the funds come from your community. This approach requires you to ensure that there are people in your community who know your business and are willing to invest in its success.

It's important not to have an overly optimistic view of crowdfunding. It's rare for strangers to fund your business en masse. Data from our platform shows that between 60% and 70% of funding typically comes from your existing network - friends, family, customers, and local community members.

Building Your Crowd

To succeed with crowdfunding, you need to build relationships with potential investors. Social media, email newsletters, and customer databases from services like Square or Toast can all help you connect with and grow your crowd.

Financial Preparedness

Finally, remember that taking on debt capital isn't a decision to make lightly. You'll need to have your financials in order and be ready to communicate the financial status of your business clearly. Platforms have a responsibility to their investors, so being financially prepared is crucial.

In summary, successful crowdfunded loans hinge on four key considerations:

1. Identifying and planning to address your business's bottlenecks.
2. Building a supportive crowd within your community.
3. Ensuring you're financially ready to take on debt.
4. Understanding that this type of funding is a commitment, not just a quick online transaction.

By keeping these points in mind, you can embark on your crowdfunded loan journey with confidence and clarity.

Stefanie:

Those are good, and I think you hit on one of the serious parts of crowdfunding to me is the community, and that sounds so intimidating. So it leads me to my next thought what do you see as industry standards? Not necessarily Honeycomb, but the success rate of businesses doing crowdfunding.

Topiltzin:

So industry standards? They vary according to types of crowdfunding, and success means different things for different folks. On the donation crowdfunding side for brick-and-mortar small businesses, we're seeing that the average business raises about $3,000, which could be great if you are relatively small or there was a big emergency that you need some quick cash to address, but that might not move the needle for you.

If you're looking for greater sums of capital In the loan crowdfunding space, we're seeing that about 60% of businesses end up raising to their minimum funding goal, right, whatever they said, that would be. On Honeycomb in particular, we're seeing that number be about 80%. And, to put it in perspective, on a debt crowdfunding platform, we see most businesses raising anywhere from $50,000 to $60,000 on average.

So you're playing a slightly larger game here, where you can raise significant sums of capital. The catch is you have to pay it back, right? This is not free money, it's not exchanged for a t-shirt type of money, so you're going to have to pay that back, and investors respond to that. They are taking a look at your campaign, and they may be considering deploying $100,000 or $10,000 into your business.

Stefanie:

Interesting. So when you see these success rates, are you seeing anything on a certain type of business that tends to do better than others, or is it more dependent on that community the business owner has built?

Topiltzin:

Yeah, so what we're seeing is a really interesting industry in the crowdfunding space. We're seeing a lot of restaurants, retail businesses, even some consumer package brands (CPG), anything that is business to consumer. So anything that has a large customer base that could have a community around it, does really well in crowdfunding because there's an inherent crowd if you're a restaurant or if you're a retail shop.

Stefanie:

And those are harder businesses to fund through banks too. So it also makes sense to tap into your community if the banks aren't willing. So I'm a small business owner, I have the community, I launch the campaign, I raise the money. What would I expect to see in the loan crowdfunding space is typical terms of repayment and interest rates, and then to follow on that as the norm. What are the controls a small business owner has? Can they set any of the terms? How does that work?

Topiltzin:

Yeah, so it varies by platform. There are many different types of platforms, all with their own philosophy. Here are a few things you can expect across the board. First, you need to have your financials well-prepared, because those financials are going to be submitted to the SEC. We want to make sure that every investor has the chance to review not just what you're doing on a surface level, but can dig into some of those high-level numbers and make an investment decision off of that.

So preparedness is very important. When it comes to rates and terms of repayment, we see a variety of options. On Honeycomb, we are doing three to five-year term loans. They are fixed rates. Currently, with the market, they range anywhere from 8% to 14% on the high end. So three to five-year term loans think about this as an alternative to a credit card, not necessarily an alternative to a SBA loan.

Other platforms might have revenue-based financing, where you pay off the loan according to a percentage of the revenue that you generated that quarter or that month. So it really varies. I'd recommend shopping around, and seeing what works best for you and your business.

Stefanie:

You touched on an important point, though, like your interest rate. You said 8 to 14%, right, and while that can sound high, it's actually not.

Well one, especially in this market. I think prime is almost at nine percent right now, and then there's the spread too. But something I've seen along my journey as a small business owner and now helping small businesses is that the only real thing we have to compare business loans to are generally our mortgages, which have been at historic lows, and I've met a lot of small business owners who are hesitant to take on capital.

Like, I hear the word like predatory interest rates, and granted, there are, like we've seen, those interest rates 50 to even 99%. But I feel like things below 25% in business aren't actually predatory. I've taken those loans because in business, when you are investing in your company, and it could grow, that's an investment into it.

And you could quickly pay that capital back, and you just created a better and bigger long-term business. But it just seems like there's like a gap in knowledge of what an interest rate should be in business. And so I wanted to emphasize that and emphasize that, like you were kind of alluding to a lot of the interest rates in business are tied to this like national number right now. Last time I looked it up, it was 8.75 plus something. So rates are high. We're in a high-interest rate market right now.

Topiltzin:

We are, and that's why it's so important to, I think, be bottleneck-oriented right? Try to avoid taking on capital unless it has a very clear use and leads you to more revenue at the end of the tunnel. So it's something that, as you look at all of the projects listed on Honeycomb or all these crowdfunding platforms, they all tend to have a bottleneck that they're addressing.

Stefanie:

It's not just like you don't want to raise this kind of capital to invest in marketing necessarily like you want to be solving a true pain point because when it's a pain point or a bottleneck, it's been kind of de-risked. You know that if you unblock that it will lead to growth, whereas maybe raising money for marketing that's more of a gamble. You could go and spend a bunch of money on Facebook ads, and there's no guarantee that it's going to convert to more business.

Okay, and so it sounds like the main risks of loan crowdfunding are: if you'll be successful, you have to have the audience raise the money, and you have to pay it back, which is a big deal. Like your business has to be able to pay it back, or I'm assuming you're on the hook. Any other risks that small business owners should think of when they think about this path?

Topiltzin:

I think you touched on the two big ones. Not having a crowd can be a little bit scary, so this goes back to building on some of those early fundamentals of launching your social media presence, having a website. These things that you do to show your business's presence are going to not just be important in helping you drive customers. They could also be important in helping you secure capital, which is super powerful because sometimes we might start discounting marketing more focused on the operations or the sales. This is really going to drive the needle for you, and it could help you build that community of return customers that we love seeing and that we figured out love investing in businesses that are running these Honeycomb campaigns.

Stefanie:

Such a good point. Okay, so one last question that I want to hear a little bit more about Honeycomb. When a business owner thinks about this commitment and going this path, what is the timeline and process like? If I think I need to raise money, how should I think about it from the time I show up on one of these websites till I have money in the bank?

Topiltzin:

So our process takes about 65 days in total. The way it starts is you will be reaching out to the Honeycomb team, or the Honeycomb team might reach out to you, as we're constantly looking for businesses with compelling projects or compelling businesses and communities that would benefit from local investment.

From that first outreach, we talk about your business, we learn more about how things have been going, what are the bottlenecks in your operation, where capital can come in, and also how ready are you for loan crowdfunding. We think a lot of businesses are doing tremendous work and building those communities. We know that many entrepreneurs go into small business work for community. We see those have great success on Honeycomb.

After that first meeting, we are collecting the financial information that is so important for our vetting process and the SEC. So we can collect that information in a relatively painless application. It takes about one to two days for most business owners to complete that. From there, we are able to get a response to you within 24 to 48 hours, letting you know whether or not you are approved to launch a Honeycomb campaign and at what rate.

So we are doing risk-based pricing. If you're really early-stage business, you might see a higher interest rate. If you take relatively safer bets, you might see a lower interest rate. From there, you get paired up with our customer success team. They will help you file the necessary materials with the SEC. It sounds complicated. It's really not. They will help you build your campaign page and shoot your campaign video, all at no cost to you. So, then the really fun part starts.

We launch a campaign and you're working with your customer success expert to spread the word, have a crowdfunding strategy from someone who's done hundreds and hundreds of campaigns coaching you along the way. These campaigns typically run for 30 to 45 days, and 80% of businesses reach their minimum funding goal.

From there, the funds go into your bank account, and then the really cool part starts. You start paying back your customers and your community, and they get a notification on their phone or in their email saying, "Hey, so and so's business paid you back." And, of course, there's no better way to build recurring customer traffic than sending your customers a check every couple of months.

Stefanie:

That's such a good point. I bet it creates almost viral raving fans in the community of that business.

Topiltzin:

It does. And now they're financially committed to your success. They're emotionally committed to your success because they saw you when you were trying to open that second food truck. Now they are at that second food truck, and they're like, oh my goodness, I can't wait to hear about your third. So all these really cool network effects start to activate, and you might find that you have more loyal fans than you think you have because we know that being a business owner can be a little bit lonely. Sometimes it's you against the world, but it doesn't have to be that way. One thing that Honeycomb is really good at is uncovering those super fans that you have in your community.

Stefanie:

Oh, I, love that so much too, because, like, as a small business owner, it sometimes feels like you mostly spend your time solving for customers that didn't get the best experience or employee problems. Like having something that actually brings to the surface happy customers that understand like what you're doing, like so rewarding, so nice, so motivating.

Topiltzin:

Yes, one of my favorite features on Honeycomb is we have a discussion feature where, after someone invests, they are invited to leave a note for the business owner, and if you look at all those notes, they are just so full of good feelings and so supportive.

I think it really makes the crowdfunding experience so much more fun, because not only are they cheering you on, but they're also investing in your future, and that feels great for a lot of entrepreneurs.

Stefanie:

Yeah, my bankers for sure don't do that for me, but that's okay. So cool. So we've talked a lot about Honeycomb, kind of throughout this conversation, but I also want to just pass it to you on, like anything we missed on Honeycomb or anything that you want to tell us about more specifically and what you all are doing.

Topiltzin:

So on Honeycomb, we talked about this big need for term loans, right three to five year term loans. We're finding that a lot of the financing options that business owners are using, particularly when they're in their earlier stages, are online loans or credit cards to kick things off and to manage the day-to-day cash flow. So we think that Honeycomb is really good at giving you that patient capital from that supportive source of investors. I also want to share a little bit about our investor base. We find that many of these folks are making their first ever investments in local businesses.

Every time I talk to business owners, they tell me well, who are these investors? They are both motivated by the return rate. There's an interest rate, it's market rate. They're investing with their finance hat on, but they're also really passionate about making a difference in their community and seeing a local entrepreneur thrive. So they're complex, just like you and I. One of our favorite anecdotes is an investor who invested in one of our first campaigns, the Pittsburgh Juice Company, and he called up our CEO saying "Hey, I just got paid back by Honeycomb. This is so cool. I'm going to go to the Pittsburgh Juice Company. I'm going to buy like $100 worth of juice." And he got paid back $6 from his $100 Honeycomb loan to the Pittsburgh Juice Company. So it's really all about changing that consumer behavior, getting more people not just to eat local and shop local but also start investing local. Put some of that money in your bank account to good work in a tangible business that you care about.

Stefanie:

That's wonderful to hear! I can definitely relate to the experiences of small business owners, and it's great to know that you share that connection as well. As a small business owner, I understand the importance of supporting local businesses within our communities. Thank you for sharing your insights today. I've gained valuable knowledge from our conversation, and I hope our audience has too. To all our listeners, thank you for tuning in to the Fundid Podcast. I trust that you found this episode to be informative and beneficial for your business journey. Remember to subscribe to our podcast and follow us on social media for more valuable content like this. Our goal is to make your business journey easier, and individuals like you contribute significantly to that mission. Once again, thank you for joining us, and we look forward to connecting with you again in a few weeks.