Honeycomb Credit has emerged as a top platform enabling firms to raise money online utilizing the Regulation Crowdfunding (Reg CF) securities exemption. Based in Pittsburgh, Pennsylvania, in the past couple of years, the FINRA-regulated Funding Portal has expanded its services across the country. As interest rates have risen and access to bank loans for SMEs has declined, Honeycomb has stepped into the void to provide an alternative to a bank loan. As these online loans are issued under Reg CF any individual may invest in these companies, earning a return of up to 15%. Honeycomb is emblematic of what the investment crowdfunding sector envisions: access to capital for smaller firms, which in turn helps these companies grow and create new jobs. Many of the firms utilzing the online lending provider are from underserved communities. Meanwhile, smaller investors can tap into a new asset class, earning a decent return.
Crowdfund Insider recently connected with Honeycomb Credit founder and CEO George Cook to learn about his company and what he anticipates for his crowdfunding platform going forward. Our conversation is shared below.
I know you come from a banking background, but can you share how you came to create and launch Honeycomb Credit?
George Cook: I am a sixth-generation community banker. My family has been running a rural community bank for over 130 years, and growing up in the family business, I fell in love with relationship lending, working with Main Street entrepreneurs located right in my backyard. Through that experience, I learned that a good relationship lender knows how to vet the financials of a business, but they also understand the quality of the business – whether a business makes a good product, treats their employees well, and is generally a good fit for the communities the business serves.
However, community banks have been consolidating rapidly – to the point that we lose one community bank every other day in the United States and as that consolidation has continued, underwriting decisions are moving from across the street to across the country, and less of that qualitative underwriting data are being used to evaluate businesses. Without this important risk segmenting tool, many larger banks have effectively forgotten how to lend to small businesses. In fact, the number of SBA 7(A) loans has decreased by almost half over the last 15 years.
Watching this trend, my co-founders and I started Honeycomb to try to bring a tech-enabled, scalable relationship lending model to the market. Honeycomb’s community capital platform allows anyone to lend to independently-owned small businesses, with the potential to earn competitive returns while supporting entrepreneurs and communities that are important to you.
Are you only issuing securities under Reg CF, or do you support Reg A+ and Reg D?
George Cook: 99% of Honeycomb offerings are Reg CF. We have occasionally hosted some Reg D offerings, but our primary focus for the time being is within Reg CF. We think it is important for Main Street businesses to both have relatively light reporting requirements and to be able to accept investments from non-accredited investors.
Also given that most of our offerings are under $1M (and usually under $250k) Reg CF continues to make the most sense for our issuers.
What is the average size of an offering? Who sets the interest rate for loans? Are most issuers consumer-facing?
George Cook: Our average offering size today is around $60,000 with a range between $25,000 to $250,000. We occasionally have larger offerings up to $1M and I expect to see more of these in the months ahead.
Most of our deals are fully amortizing loans with terms from 3 to 5 years. Our rates average about 12% today and range from 9% up to 15%; these are determined by a business’s operating history, the strength of personal guarantees, and collateral coverage, which nearly all of our loans include.
We specialize in working with direct-to-consumer or B2B2C businesses which can run the gamut from restaurants to retail shops to ecommerce businesses to craft beverage companies. Generally speaking our businesses have a direct touch point with their customers and they are a local brand that resonates with their customers.
Do you consider yourself a bank replacement platform? Will you ever offer other types of securities?
George Cook: It’s no secret that banks have moved dramatically upstream in the small business lending landscape. The average SBA loan in 2007 was $146,000, 15 years later in 2022 it was up to $543,000 – a 270% increase that makes SBA loans increasingly out of reach for most Main Street entrepreneurs. As competition grows more heated for larger commercial loans, fewer bank lenders are supporting younger and smaller businesses.
I actually view Honeycomb as extremely complementary to traditional bank lenders. Rather than competing with banks, I envision a world where banks are actively investing on the Honeycomb platform – fulfilling their Community Reinvestment Act requirements while building relationships with growing businesses that will eventually need larger commercial loans. It’s the VC equivalent of a scout fund but for banks.
Last year, the number of issuers leveraging your platform increased. In fact, for several months, Honeycomb was the top platform for Reg CF filings. Was this due to businesses being turned away from banks? Or was this simply organic growth?
George Cook: Yes, we’re thrilled to have been the second most active funding portal last year measured by total number of issuers, and that growth is only going to continue into 2024! This is driven by a continued retreat of banks from small business lending and our continued success in reaching small businesses.
How do you promote your services for small businesses?
George Cook: One of my favorite things about Honeycomb is that each loan serves as a little billboard for Honeycomb. When businesses historically got loans from banks or online lenders, these were private transactions that got very little public attention. But with Honeycomb, businesses are sharing their offerings across social media, email blasts, and even in-store collateral. This obviously has the advantage of bringing investors to their offering, it also has the advantage to Honeycomb of building local brand awareness with other business owners in the same community. By tapping into these local network effects, we can activate new markets and leverage existing offerings to help us find more businesses to work with.
Are investors typically part of the businesses’ community? What is the profile of an investor on your platform?
George Cook: We find that approximately two-thirds of investors in an average offering are located within the same community as the businesses they are investing in. That also means that one-third or more investors are investing beyond their community.
A common user journey is that an investor will discover Honeycomb with a favorite small business, making an initial investment. As they receive successful repayments, many investors get excited about Honeycomb as an asset and begin to build diversified portfolios across the site.
Do you continue to experience robust activity for small firms raising money on your platform? What are your expectations for 2024?
George Cook: Yes, growth has been exceptional for Honeycomb throughout 2023, and we’re building on that momentum in 2024. By the end of the year we plan to be serving up to 100 small businesses at any given time on the site. To put that in perspective, in early 2023, we were serving an average of only about 10 small businesses at any given time. This growth will allow us to serve more Main Street entrepreneurs and communities and also give investors an opportunity to build increasingly diversified portfolios across the site.
You are a member of the SEC’s Small Business Capital Formation Access Committee. Recently, you advocated on behalf of democratizing the definition of an Accredited Investor. Can you share how the definition impacts Honeycomb? And why do you believe it should be expanded?
George Cook: Part of the beauty of Honeycomb, and Regulation Crowdfunding more broadly, is that we are able to create new investment opportunities for non-accredited investors. And the overwhelming majority of our user base is non-accredited. Expanding the definition does lift the investment cap for some Honeycomb users, but the overall change for the Reg CF industry is fairly small.
Outside of Reg CF, the data show that more private companies are staying private longer, and therefore, more wealth creation is happening within private markets instead of public markets. It is my opinion that it is important to let more people into those private markets to gain the opportunity for wealth creation. Of course, there is risk investing in private markets, and we as an industry and a society need to be thoughtful about educating new investors on those risks.
As for the securities crowdfunding regulatory environment, what issues or regulations do you believe need to be improved? Any big plans for new features or services in 2024?
George Cook: At Honeycomb, we believe that the number one issue preventing more businesses from successfully using Reg CF to grow and thrive is the requirement for reviewed or audited financials for any offering above $124,000. This adds tremendous costs—in both time and treasure—to the fundraising process that does not match industry standards. For example, multi-million dollar SBA loans often do not require reviewed or audited financial documents, much less sub-$250,000 loans.
Fortunately, there is real progress. The Office of the Advocate for Small Business Capital Formation at the SEC recommended increasing the reviewed financial threshold to $500,000 and a new House Bill contemplates raising it to $250,000. Either would be a tremendous step in the right direction for letting more businesses unlock growth capital through Regulation Crowdfunding.