Platform aims to turn small-business customers into investors

Honeycomb Credit, a Pittsburgh-based technology firm, has built a crowd-funding program that it is hoping to bring to small businesses across Pennsylvania.

To help raise awareness, the firm has partnered with the Pennsylvania Downtown Center, a statewide nonprofit based in Harrisburg.
The center will help Honeycomb extend its reach across the commonwealth under a pact the two entities have named the Main Street Champion program. PDC and Honeycomb will work together to spread the word to Main Street managers, who will be encouraged to refer businesses to Honeycomb’s crowd-financing platform.

“We have created a way for small, locally owned businesses to borrow from their customers for a purpose. Could be they are moving, or investing in new equipment, whatever the reason,” said George Cook, co-founder and CEO of Honeycomb Credit.

Cook said Honeycomb designed its crowd-financing platform to help small businesses that may have a hard time obtaining traditional bank loans. Many small businesses, turned down by banks and other financial institutions, find themselves struggling to repay a high-interest loan or floundering due to massive credit-card debt.

Cook said that banks and credit unions should not be concerned about Honeycomb’s partnership with the downtown center or the crowd-financing program in general. Instead, he said, he expects traditional financial institutions to view the firm as filling a needed gap in financing.

“Businesses now have the opportunity to get customers involved and excited about their venture,” Cook said. “When customers invest in your business, they become your biggest cheerleaders.”

Here is how it works.

A small business starts a campaign online and on social media to coax its customers to invest in such ventures as starting a food truck, moving to a larger storefront or buying equipment to run a grocery store more efficiently.

Interested investors head to the Honeycomb website where they can create an account and invest directly from their bank accounts. The minimum investment is $100, while the maximum a company can raise is $100,000.

All investor funds then sit in an escrow account until a pre-agreed funding goal is met. If a campaign fails to reach its goal, all funds are returned to investors. The website states that a campaign can take several weeks from start to finish. By law, a campaign is expected to stay open a minimum of 21 days.

“When a campaign ends successfully, funds are released from the escrow to the small business,” Cook said. “The business executes on their project, and begins making monthly payments back to their investors through a third-party account, so they don’t have to write dozens of checks each month.”

Cook said Honeycomb charges a $250 posting fee to businesses when they set up a campaign page through Honeycomb, a fee that covers the firm’s underwriting expenses. Businesses that register through the Main Street Champion program are eligible for a discount.

The posting fee also goes toward a one-time 6 percent to 8 percent origination fee based on how much a company raises. Honeycomb also charges a 2.85 percent investment fee capped at $37.25 per investor. All the principal and interest go back to the investors.

Silas Chamberlin, vice president of economic and community development for the York County Economic Alliance, said that he views the partnership between Honeycomb Credit and the downtown center as a great way to connect entrepreneurs to capital.

“It is a good thing for Pennsylvania’s small-business community, especially, to have a resource that activates private capital and incentivizes investment in our small communities,” he said.

Chamberlin said the program allows businesses to market themselves and generate buy-in from consumers who become financiers.

“Like in the Kickstarter model, consumers are more likely to be loyal to businesses and products they have invested something in — even if it is just $100,” he said. “For some businesses, Honeycomb may allow them to tap into capital that they couldn’t get from a bank because Honeycomb investors are primarily concerned with community-benefit.”

He said he sees many savvy business owners, especially those with lifestyle and retail operations, being interested in crowd-financing.

“In my opinion, the more exciting potential is for the investor/financier, who now gets to make a business in their community possible by supporting a local entrepreneur. They can play a role in the success of their Main Street businesses as more than consumers, and if all goes well, they will benefit financially,” Chamberlin said. “It is a potentially exciting way to activate capital that is currently sitting on the sidelines, in small communities.”

Kim Kmetz, main street manager of the Easton Main Street Initiative, part of the Greater Easton Development Partnership, has been a fan of the Main Street Champion program since it was announced this year. But, she said, she cannot officially endorse the program until it is fully backed by the Greater Easton Development Partnership.

Once she is given the greenlight, Kmetz said she plans to promote Honeycomb’s funding mechanism.

“I want to see Easton become the first in the Lehigh Valley to be a Main Street Champion,” Kmetz said. “Easton is a good fit because we do not have chain businesses. We have the Farmer’s Market, public market and small downtown businesses.”

The Champion program also has a fan in Allentown.

“I love it, and I could see myself investing in a small business. It is only $100 minimum,” said Miriam Huertas, senior vice president of the Allentown Chamber of Commerce, which oversees the Downtown Allentown Business Alliance. “Main Street programs help the community, and this program can provide the city with an additional funding stream. It will be an additional thing to add to our toolkit.”