SEC turbo-charges crowdfunding for small businesses
Honeycomb Credit is a small crowdfunding company in Pittsburgh, Pennsylvania. It typically handles 10 inquiries a day from business owners seeking loans from the community. Since pandemic hit, it is averaging 30 to 40 daily.
“We’ve completed about a dozen live campaigns already and recently closed our first tranche of relief loans,” said Chip Homer, director of growth at Honeycomb Credit. “Eleven people in Pittsburgh are helping thousands of businesses reach out to the community to access capital.”
Honeycomb Credit’s business model differs from traditional crowdfunding sites like Kickstarter. Instead of letting people invest in return for merchandise, Honeycomb enables individuals to crowdfund loans for local businesses. It’s running 12 relief loan campaigns and has deployed $1.5 million in community capital since launching in 2017.
Government deregulation eases the process
The demand Honeycomb and other crowdfunding platforms are seeing is the result of the federal government’s well-intentioned moves that help and hurt small businesses. At the onset of the pandemic, Congress released $350 billion in small business aid but that ran out in days. Small businesses were forced to look for alternatives. That’s where crowdfunding came in.
To help spur lending, the Securities and Exchange Commission is relaxing some of the crowdfunding rules to make it easier for small businesses to launch campaigns. The new rules require companies to file an independent audit only if they are raising $250,000 or more. The limit was $107,000 before the pandemic. Small businesses can also launch offerings without all the documentation traditionally required.
When announcing the SEC would temporarily ease reporting requirements, chairman Jay Clayton said he was responding to feedback from Small Business Capital Formation Advisory Committee and others who expressed difficulty in conducting an offering quickly enough to survive the pandemic-induced slowdown. “In the current environment, many established small businesses are facing challenges accessing urgently needed capital in a timely and cost-effective manner,” Clayton said.
While bank loans are an option, they are hard to come. Take the Federal Reserve’s Main Street Loan program, announced in March and launched in June. Businesses with less than 15,000 employees and under $5 billion in revenue in 2019 are eligible to apply for loans through approved banks. Banks can sell most of the loans to the Federal Reserve, mitigating their risk from defaults. But the Brookings Institution said in a recent research report banks aren’t showing much interest in the program. Some point to the complexity associated with the loans. As of the start of July, the Fed said not one bank has issued a Main Street loan.
In addition to crowdfunding loans, Honeycomb is selling loyalty bonds for its business customers. They are gift cards worth 1.3 times their value. Customers get the gift card in four installments over 24 months. Payouts start six months after the campaign ends to avoid overwhelming business owners. The crowdfunding company is currently running 37 loyalty bond campaigns. “They have been responsive and have streamlined some of the processes we had to go through to help during the pandemic,” said Homer of Honeycomb Credit. “It gives them more wiggle room.”
When the pandemic hit, Justin Strong, owner of Strong II Dry Cleaners in Pittsburgh, quickly took advantage of any aid available to small businesses. Even though dry cleaners were classified as essential businesses, shelter-in-place orders decreased the need for service.
Like other business owners, Strong found it difficult to wait for funding. Instead of remaining idle, he sought alternatives, including Honeycomb Credit. “I wasn’t really excited about putting my energy into crowdfunding. I was one foot in and one foot out,” said Strong. Strong did not need the crowdfunding as government loans came through during the application process.
Thanks to a little nudging by Honeycomb, Strong moved ahead with the campaign. He could use the money to purchase high-end equipment to provide deep cleaning services to gyms and hotels once businesses began to reopen. It also seems prudent to have money in the bank in case loans are harder to come by in the post-Covid-19 world.
A little over a week after Strong launched his campaign, he raised $25,000 for the 90-year-old black-owned dry cleaning business. The campaign yielded $15,000 more than his borrowing goal. Generally it takes 40 days for a campaign to fund. “It was surprising. A lot of people I didn’t know, random people, started investing,” said Strong. Strong isn’t a stranger to borrowing money as a business owner. In the past he would pay much more for the access whether it was through a predatory loan or an equipment leasing arrangement.
Many business owners are turning to crowdfunding to raise capital. Ever since the Jumpstart Our Business Startups or JOBS Act made it possible for individuals to act as investors, crowdfunding has been taking off. “It’s here to stay,” said Ken Alozie, a certified SCORE mentor and principal at Greenwood Capital Advisors. “We’ve been seeing more and more activity in the crowdfunding market even prior to the pandemic.”
Crowdfunding is also a conduit to get donations into the hands of struggling business owners. That’s what Soy Emprendedor, the Winston Salem, North Carolina group that inspires entrepreneurship among Latin and Hispanic populations, is doing with its “Restart Winston Salem: One Tile Campaign.” Launched at the end of May, Soy Emprendedor, The Cumi Group and PixGift teamed up to enable the community to donate to local businesses. Their fundraising efforts will help businesses reopen once restrictions lift. Donations cover cleaning supplies, restocking, marketing, utility bills, and payroll for employees during the first week the business reopens.
The group wants to raise $20,000 initially, aiming to help 40 businesses. It’s currently at 44 percent of its goal. The crowdfunding campaign melds social media with fundraising by encouraging donors to upload a photo and leave a message for the local businesses.
“What we’re trying to accomplish with the donations is to give them a boost when they start reopening. Some of these businesses are so small that going through the process of getting loans and grants is very difficult,” said Karla Mounts, founder of Soy Emprendedor. “The platform allows us to community build virtually.”
(Edited by Adrienne N. Wartts and Allison Elyse Gualtieri.)