The Price of Money: How Does Your Small Business Financing Stack Up?
It seems kind of twisted to say that it costs money to raise money for your business, but it’s the truth of the matter. Whether it’s in interest rates, posting fees, early repayment fees, or unsung costs, you’re going to have to spend a little bit when you look to raise capital for your business’s growth.
But how do different types of funding stack up against each other in terms of cost? Here’s a breakdown of some of the most common funding options for small businesses, and their costs.
How much does it cost to run a crowdfunding campaign?
Most crowdfunding platforms (including us) will charge some kind of a fee to run a campaign on our site. After all, when you raise money on a loan crowdfunding campaign, all the principal and interest is paid back to your investors, not us, and we need to make money somehow! For Honeycomb, it’s a flat $250 posting fee. We also charge a rate off of the total amount raised, between 6-7%.
No matter the crowdfunding platform you choose to raise money on, there are often going to be unspoken costs to running the campaign as well. Most crowdfunding portals expect you to do all of the work of writing your campaign page and promoting it yourself. That’s a ton of your time and energy that you could be spending on your business!
With your Honeycomb campaign, you get a professionally-built campaign page and pro-shot campaign video that’s covered by your posting fee. We also provide you with a personal crowdfunding coach who helps you strategize and shape your campaign to reach more people - this is far more than most crowdfunding portals will do!
“There are not enough words to express how much I appreciate the entire team at Honeycomb,” says Samantha Story-Camp, owner of Pip and Lola’s. “I have run an Indiegogo campaign and two KIVA campaigns already. While those three campaigns were all "successful," they were also incredibly stressful. Having the resources that Honeycomb provided (like content and my crowdfunding coach's excellent cheerleading) allowed me to focus my energies where they needed to be. I would recommend them to any small business anytime.”
If you’re running a rewards crowdfunding campaign through a site like Kickstarter or Indiegogo, you might not have to deal with the cost of paying back your backers, but you will have the cost and burden of fulfilling all those rewards that you created! Think about it: if you offer a free t-shirt with every $100 contribution, as those fill up, those are a lot of t-shirt orders to fill out and ship
How much does it cost to get a bank or SBA loan?
Bank loans are currently going to have an interest rate usually between 2.54-7.02%. This is on the low end, for sure, but banks are notoriously picky about who they choose to lend to, and if you’re a risky business or a young business, if you even get a meeting with them, your interest rate will probably skew a bit higher.
Banks will also have an origination fee, servicing fees, and prepayment fees. That’s right: if you’re doing well enough that you can pay off your loan early, you get fined for that! (Honeycomb doesn’t charge prepayment fees, by the way).
If you get an SBA 7(a) loan, one of the most common small business loans, your interest rate will be from 5.5-8%, depending on the loan amount and the repayment schedule. They base interest rates based off of the prime rate, plus a lender spread. This spread can be fixed or variable, meaning depending on how the market is acting, you could be paying different amounts of interest.
The SBA charges a host of fees on top of your interest rate, some for the cost of putting together your loan, and others for protection in case you default on your loan. These fees include packaging fees, extraordinary servicing fees, guarantee fees, closing fees, annual servicing fees, underwriter’s fees, and prepayment fees.
How much does it cost to get an online loan from Square Loans or Kabbage?
One common route that small business owners take when looking for fast capital is to look for online loans, or merchant cash advances. While these have the advantage of being lightning fast and accessible for most businesses, they come with astronomical fees and APRS - from 80% to 200% in some cases!
That should honestly be enough to deter you already, but MCAs are notorious for putting things in the fine print that come back to bite small business owners. Confessions of Judgement, sneaky revenue sharing, prepayment fees, and more can cause trouble to small business owners who choose these lenders.
Does the cost outweigh the benefit?
So, after reviewing the costs of these different methods of raising capital, where do you land? It’s also worth noting that Honeycomb campaigns, on top of the cost, do provide benefits far beyond just the money in the bank, including stronger customer relationships and improved marketing reach.
To learn more about Honeycomb campaigns, fill out the form below!