What is a Fixed-Income Interest Rate, and What Makes it Special?
Updated: Jan 11, 2022
Besides the fact that you can invest in a small business for as little as $100 on Honeycomb, there are a ton of really cool features baked into our platform that make it special for both investors and the small businesses that crowdfund on our platform.
One such feature is the fact that our crowdfunded small business loans come with a fixed-income interest rate. We’ll get into exactly what that means in a bit, but we love it because it benefits not just the businesses that crowdfund with us, but also the investors who invest in these businesses!*
A peek into Pip & Lola's new store in the Strip District - funded by a Honeycomb campaign!
Fixed-Income Interest Rate vs. Variable Interest Rate
So, there are two main types of interest rates when it comes to small business loans - variable and fixed income interest rates.
A variable interest rate is a very common kind of interest rate in lending. It’s also known as “adjustable” or “floating” because it changes periodically based on the market.
Variable interest rates usually are based on a benchmark known as a prime rate, and banks often use this prime rate with a bunch of other factors based on a business’s own credit in order to determine the rate they’ll charge. As the prime rate fluctuates, so will the lendee’s interest rate.
On the other hand, fixed-income interest rates are, well, fixed. They remain static throughout the duration of the loan - a 5% interest rate stays 5% until the loan is totally paid off.
This means that no matter what, an investor knows they’ll receive a return on their investment worth the amount of the interest rate on their principal, and a business will know that they’ll be paying exactly the principal plus interest on their loan.
Why the Fixed-Income Interest Rate is great for small businesses
For small business owners that crowdfund with Honeycomb, the fixed-income interest rate is one of the highlights, because it provides stability for their repayment plan.
With a fixed-income interest rate, you know exactly how much you’re paying. It’s a simple calculation - the amount of money you raise, plus the interest on it! This makes it all the more simple to plan ahead as they begin to pay back the loan.
Additionally, with a fixed-income interest rate, a business owner won’t unexpectedly have to pay more than they were planning for. If the prime rate goes up, that doesn’t matter because the fixed-income interest rate stays the same.
This is especially wonderful when a business is undergoing a major project, like a renovation or opening up a new space. There are already so many unexpected aspects to growing a business, especially these days, so the amount one pays on interest should not be one of those surprises!
“What I loved about Honeycomb was that I could think of these people who have been supportive of us from the very beginning in a very tangible, ‘here's some money’ kind of way,” says Samantha Story-Camp, owner of Pip and Lola’s soap shop in Pittsburgh. “I actually was kind of glad when I found out my interest rate was a little bit higher, because that meant my supporters could earn more.”
Why the Fixed-Income Interest Rate is great for investors
As an investor, the fixed-income interest rate can be valuable to you, too! You know exactly what you’re getting, and when because the interest rate means a fixed cash flow.
Many investors like to include fixed-income investments in their portfolio because they’re a steady stream of income that can help diversify your portfolio against more varied investments.
Also, you can potentially receive higher interest investing into a small business than you would if it just sat in a bank. Right now, the average bank interest rate is about .06%, whereas a Honeycomb investment sits around 5-12%. Of course, we should add that investing is obviously very different from saving your money, and always does carry some amount of risk.
As always with investing in small businesses on Honeycomb, the main benefit is that you know that your investment is going towards helping a small business grow and empowering entrepreneurs to achieve their goals and dreams.
With a Fixed Income Interest Rate, you know what you’re getting
And with a Honeycomb campaign, you also know that with the interest rate you’re also getting the satisfaction that you’re investing in a local business and helping them grow.
Explore live campaigns on Honeycomb now and say “yes” to an entrepreneur’s dream!
*Disclaimer: this blog post is for educational purposes only and should not be considered investment advice. Investing is inherently risky and investors should be prepared to lose some or all of their investment.