Fast Cash Isn’t Worth the Debt Headache: Why We’re Refinancing High Interest Small Business Loans
Updated: Aug 25, 2021
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At Honeycomb Credit, we hear this far too often, “I have more customers than ever and sales are on the rise. Still, my bottom line isn’t moving. Where is my money going?”
Whether it’s pottery studios, breweries, boutiques, or juice shops, new businesses are being created every single day. While this influx of businesses improves the fabric of our communities, creating profitable, stable small businesses isn’t easy. And, as you can imagine, access to capital plays a big role.
Businesses need a reliable source of capital to weather the ups and downs of daily operations. As high-interest rate online lenders and credit cards are becoming the go-to financing strategy for small businesses, we here at Honeycomb have made it a priority to help businesses avoid and exit cycles of high-interest debt. Honeycomb has officially entered the refinancing world.
Small businesses are being pushed to take on short-term high-interest debt
If you’re not a business owner, here’s something that might surprise you: banks are no longer the go-to source for small business capital. The consolidation of the banking industry and increased regulatory pressures have made it difficult for banks to lend small dollar amounts to most businesses lacking at least three years of stellar operating history.
As a result, credit cards and high-interest rate online lenders are an increasingly popular source of funding. In fact, the 2019 Federal Reserve Small Business Credit Survey showed that 52% of businesses relied on their credit card to finance growth projects. The survey also showed that 32% of small businesses seeking financing applied to online lenders such as Kabbage, OnDeck, Square Capital, or CANCapital. These alternative sources of capital can offer approvals in a matter of just a few days, in exchange for much higher interest rates.
In principle, this is not a cause for concern so long as these lenders are being transparent with their costs and small businesses are taking on short-term debt that they can confidently repay. However, as we’ve seen, the terms are rarely transparent and this “fast cash” leaves small businesses no room for error.
The two most common sources of “fast cash” loans are credit cards and online small business lenders (typically lending in the form of merchant cash advances or very short term loans). Many small businesses initially drawn to credit cards’ introductory 0% APR period find themselves shocked as credit cards phase in their regular APRs ranging from 18% to 24% or more. Other businesses, unaware of fairer sources of capital, take on debt from high-interest online lenders that charge from 20% to over 99% APR on their short term loans. These alternative financing options may be great for short term needs, but can quickly spiral to long term headaches.
Successful businesses we know and love are trapped in debt
Earlier this year we met Vico Restaurant, a high end restaurant serving farm-to-table Tuscan cuisine in Hudson, New York. Mark, the owner, has a booming business during the busy summer season, but when winter comes along, cash flow can become tight. Like many small business owners, Mark turned to credit cards and online cash advances initially to help even out his seasonal cash flow, but season after season, his short term loans slowly transformed into long term loans that he carried on his books year-round. Despite business getting better every year, Mark's bottom line wasn’t budging, due to his growing financing expenses.
Around the same time we talked to Mark, we were connected to Clark of Pope’s Kitchen, an artisanal sauce and cocktail mix maker based out of Cleveland. Clark had started his business like a lot of entrepreneurs; he used personal savings and augmented those funds with credit cards and higher-interest loans. As his business began to take off, he found that much of his money was going to pay off the loans he had taken out along the way, putting his plans for geographic expansion on the back burner despite his growing popularity.
Clark of Pope's Kitchen with a bottle of their delicious Lavender Lemon Syrup
And it’s not just these two great businesses that felt this pain, there are millions of small businesses caught up servicing high interest rate debt.
Mark and Clark both knew they needed a way to consolidate their various short-term debts into one long-term affordable monthly payment. Unfortunately, capital for refinancing loans can be notoriously difficult to find. Oftentimes Community Development Financial Institutions (CDFIs) won’t fund debt refinancing. Meanwhile bank SBA programs can periodically be used to refinance high interest debt but the process can be time-consuming, leaving the sting of the large payments for many months.
Giving businesses a place to turn to: Honeycomb enters the refinancing world
That’s why Honeycomb is proud to announce that we are opening up our loan crowdfunding model to help small businesses refinance credit card and high interest debt! We have already done three successful refinancing campaigns, Vico Restaurant, Pope’s Kitchen, and Mompops.
Pope’s Kitchen borrowed $50,010 from 28 community investors on Honeycomb. Clark used these funds to refinance high-interest debt, free up cash flow, and start focusing his attention on expanding his brand nationally. Mompops, a popsicle company based in Kennett Square, PA borrowed $24,450 to free up cash flow to meet growing demand from retail partners across the Mid-Atlantic, including Whole Foods and MOM's Organic Market.
Owner Mark cooking in the kitchen at Vico Restaurant
Vico Restaurant borrowed $40,000 from 24 community investors at a 12% interest rate. Mark refinanced short-term debt, freed up cash flow, and began planning an interior renovation of his restaurant. After running a successful campaign Mark told the Honeycomb team, "A big comment I got [from potential investors] was "Isn't 12% expensive?" to which I would reply that for us it's a bargain, and less than half of what we're currently paying on our short-term debt. They also wanted to know why we aren't getting a bank loan, and I would explain that the banks simply aren't lending to businesses like ours, except via credit cards."
Honeycomb Credit is excited to provide businesses a quicker way to refinance debt while getting their community invested in the businesses' exciting growth projects. We believe that instead of paying principal and interest on a loan to a faceless credit card company or an online lender, businesses should be able to refinance and repay fair-interest loans to their neighbors and customers - keeping the money local.
How can you get businesses back on the path to growth
For many businesses just starting out, it can be discouraging to learn that traditional banks may not be comfortable lending to them for another few years. When a credit card is in your wallet and an online lender just one Google search away, it’s no surprise that businesses turn to these options when they are strapped for time yet rich with opportunity. That’s why it’s time for business owners, business associations, and neighbors to have an open conversation about business debt and alternatives to high-interest online-lenders and credit cards.
Our community should make sure that businesses are aware of their full set of funding sources such as the local CDFI, a city/county microloan program, Kiva, or Honeycomb Credit. Making businesses aware of sources of capital can save many businesses from these hamster wheels of debt we see so often.
But for those businesses caught in a cycle of debt, today we’re particularly proud to announce that Honeycomb is one of the few organizations connecting them to a community of investors ready to help. Let’s work together to help businesses worry less about cash flow and instead focus on building a strong, connected Main Street.
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