The new approach helps foundations lend crowdfunding loans to creative economies

Although she was not an artist herself, Christina Hale had a long-standing passion for the arts. She was also sworn to be puzzled. But about eight years ago, she thought about what she sees as a lack of representation of blacks in the puzzle industry. Then she came across an artist’s work that she thought would make a great puzzle.

With this she came up with an idea: puzzles involving works by colorful artists. Six years ago, she started making small batches of puzzles. Then, in 2018, she formed the Dope Pieces Puzzle Company, a business in Atlanta, to sell its products. Orders did rise after interest in black-owned businesses rose after the assassination of George Floyd.

But maintaining demand and expanding to more places was still difficult. Hale then learned about Honeycomb Credit, a group loan financing platform that had a new initiative linking the foundation’s investments to campaigns. In the end, it raised about $ 30,000 from 44 investors, including $ 10,000 from the Souls Grown Deep Foundation and the Community Partnership. “I was able to buy puzzles, bring in another employee and rebrand,” says Hale. “It was a very significant investment.”

Loan participation fund

Hale was one of the first entrepreneurs to take advantage of a new initiative called the Loan Participation Fund. Launched by Upstart Co-Lab, a non-profit investment focused on the creative economy, and Honeycomb, it provides a way for institutional investors to participate in group funding campaigns. “When companies raise their minimum target, it unlocks $ 10,000 from a participating foundation,” said Laurent Callanan, founder of Upstart.

Three foundations, all part of the Upstart community of influential investors, have pledged to invest $ 600,000. Souls Grown Deep and the family-run AL Mailman Foundation will invest in black-owned businesses in nine southern states. The Jessie Ball duPont Foundation will focus on entrepreneurs in seven counties in Northeast Florida, with a focus on low-income communities, women or people of color.

Most of the businesses that have raised capital through the Honeycomb platform since 2018 are businesses with a creative economy such as cafes, breweries and fashion brands, which also play an important role in local economies. In addition, 46% were in low- to moderate-income communities, 49% were owned by women, and 24% were owned by BIPOC.

The non-profit FJC provides operational support to foundations and acts as an intermediary for the fund.

Crowdfunding platform for loans

George Cook, CEO and co-founder of Honeycomb, whose family has run a small public bank in rural Appalachia for 130 years, has worked for many years as a consultant to financial services companies. During this time, he watched big banks take over more and more little boys, and worried that this would limit the amount of capital available for small business loans.

Then, in 2017, he and small business owner Juice Shop owner Ken Martin discussed ways to return more community-focused capital to the independent small business equation. Eventually, they came up with the idea: to build a crowdfunding platform for loans, allowing participants to invest in public ventures. “As businesses grow and repay their loans, investors know their money will work in their own community,” Cook said. “And as businesses thrive in their own community, investors can take advantage of that.”

They issued their first loan in 2018. To date, they have worked with over 200 businesses. By using not only Honeycomb’s analytical skills, but also Cook’s deep understanding of small business risk, the platform is able to raise money for companies that cannot obtain bank loans. Half of Honeycomb’s companies have refused a loan from the SBA or the CDFI.

Leveling the playing field

Kalanan met with Cook in 2020 when he learned that 80% of the business on the Honeycomb platform is a creative economy venture. Cook, as it happened, was already exploring ways to encourage institutional investors, especially field-based foundations, to help lend to the platform’s businesses, especially those in underserved communities who have trouble achieving their stringent goals. the platform. “We were looking for a way to level the playing field,” he said.

For his part, Kalanan understands that while many foundations understand the impact that small businesses can have on communities, they face many logistical challenges in auditing these companies and managing relationships. Gathering their heads, Kalanan and Cook devised a plan. Each foundation will write a check, put it in the account and indicate the types of businesses it wants to target. Then Honeycomb, which will receive a closing fee of 6% to 8% for each loan, will find and test these ventures and help involve their communities.

Each participating foundation starts with a commitment of at least $ 250,000, lending $ 10,000 to up to 25 companies. To receive this money, each campaign must reach a minimum goal. This is done through the usual group funding strategy, reaching out to customers and others in their community, but also with the help and guidance of Honeycomb. “The foundation’s money doesn’t actually go to work for the company until the crowd gives them a thumbs up,” Callanon said. The first investment from Souls Grown Deep took place earlier this year. A total of five businesses received investments.

Without administrative fees, foundations are likely to receive a return of 8% to 9%, according to Kalanan. “We believe in the impact of companies that gain access to capital, but foundations want to know that they are making a good investment at the same time,” she said.

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