Happy New Year! I hope everyone had a joyful and well deserved holiday season with family, friends and loved ones. As we kick off 2025, I wanted to share little something I have been experimenting with.
I’ve decided to sink cash in Honeycomb this year because I like the simplicity of the platform and the fact that connects investors with locally owned businesses who are seeking funds. And since I like supporting locally owned businesses and I like earning returns on my investments, it seemed like a pretty good fit for me. However, as I have stated many times before, like all investments, it comes with risks—especially around borrower defaults and the illiquidity of loans.
Here is my take on it from an investor point of view.
The Pros
- Higher Potential Returns: Interest rates on loans can range from 6% – 12% or more, depending on the risk profile of the borrower. That is a pretty good return when compared to traditional savings accounts or even bonds.
- Regular Income Stream: The interest payments made by borrowers can provide a regular, predictable passive income stream. Which in my opinion is a pretty appealing option, as you see cha-ching in your bank account on a monthly or quarterly basis, until the loan is fully paid off.
- Affordable Entry: Honeycomb allow you to start investing with relatively low minimum amounts as low as $100.
- Local Impact: This is the feel good part because you are making an impact and a difference by way of supporting the growth of small businesses. When doing so, you are also creating jobs in your community. A true win-win situation!
- Diverse Options: My money, my choice….I can invest in a food truck, brewery, mom and pop pizza joint, coffee shop, tearoom, bakery, distillery, floatation therapy (check out Float8), authentic Columbian restaurant and the list goes on.
- Debt Base Investment: As an investor, I lend money to a business with the expectation of receiving regular interest payments over time, and the business repays the principal amount at the end of the loan term. For instance, if I invest $10,000 and the loan term is 36 months with interest rate of 23%, at the end of the term I collect the $10,000 in principle plus $2,300 in interest.
- Assessments: Before each business gets listed on the platform, it has to go through a vetting process, which helps assess the risk level of lending to a particular business. More on the vetting process can be found here. However, the success of each business is often tied to its local reputation and customer base. Something to keep in mind when selecting where to invest.
- Compound Interest: The eighth wonder of the world! Why?….because it transforms time and patience into wealth. As interest payments from my loans are repaid, I can reinvest those payments into new loans, creating a compounding effect over time. Need I say more!?
- Fees: What I love about Honeycomb, is that you can invest as little as $100, not only in one particular business, but multiple business types, for 6% – 12% return at a cost of 1% in management fees annually on the total amount invested. Stop and read this sentence again.
The Cons
- Default: There is a risk of a business failing to repay their loans. When that happens, you lose your principal investment and all the interest payments tied to the principal. Although business are vetted, by nature small businesses are inherently riskier.
- Uncertainty: As with anything in the investment world, small businesses are more vulnerable to external factors, such as fluctuation in the economy, competition, or even natural disasters. These factors can affect the ability of businesses to generate revenue.
- Illiquidity: I wanted to bring this up but for me personally, this isn’t a con. For some of you, the lack of liquidity could be a concern because once you invest, your money is locked for the duration of the loan (36 months). So if you need your money, you can’t withdraw your funds before the 36 months are up.
Sneak Peak
Conclusion
P2P Lending with Honeycomb can still be a good investment if you’re comfortable with the risks and are looking for alternative income sources with the potential for higher returns. However, it is essential to do your homework first before you commit.
On that note….wishing you a prosperous New Year and happy P2P investing!
