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Restaurants & Bars

A Small Dallas Bakery Is Pursuing a New Investment Strategy: Bonds

Regulated crowdfunding is a new field that allows small business owners to pursue more organized versions of GoFundMe—versions that repay customers, with interest.
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Sandra Daniels, of Hippos and Hashbrowns, is one of the first Dallas-area small business owners to try issuing bonds. Lisset Bell, courtesy of Sandra Daniels

Last week, we published a guide to Dallas’ best cookies. But one of our featured cookie bakeries has a much rarer item on its menu this month: a bond issue.

When Hippos and Hashbrowns, the East Dallas bakery that supplies local farmers markets and stores with cookies, crisps, and biscuits, announced that it was selling bonds, my first reaction was, “what?” I thought bonds were a municipal thing, a safe-but-dull backstop investment used by governments to fund new schools.

But the Securities and Exchange Commission recently greenlit small business bonds, as a “regulation crowdfunding” mechanism passed in Congress’ bipartisan 2012 JOBS Act. It’s an alternative to the more donation-centric model provided by platforms like Kickstarter and GoFundMe. And Hippos and Hashbrowns is giving it a try.

“This is a really good thing,” says the bakery’s founder, Sandra Daniels. “I get the money that I need. It’s lower than a conventional interest rate, probably a little bit higher than [a Small Business Administration loan], and a lot lower than an unsecured rate, like if you put it on your credit card. People who invest earn 10.5 percent interest. You’re getting your community really involved in your business, and they’re getting something back for it. People are getting a real feeling of buying into your business.”

Daniels turned to the bond idea after her SBA loan was rejected; her banker said the bakery’s revenue fell just short of requirements. She considered GoFundMe and similar platforms, but balked at the processing fees (GoFundMe charges 2.9 percent, plus $0.30 for every individual donation, plus a corporate “tip line” that can discourage donors from giving more to the cause itself).

She also disliked that donors don’t retain a real investment in the business’ continued success. She’s donated to GoFundMes in the past and knows the emotional appeal, but she wanted to build a longer-lasting connection.

“They get the joy of supporting you, which is terrific, but they don’t get an actual return,” Daniels explains. “Yes, it’s very simple for someone to send you $10 or $20 or whatever, but you’re only pulling from your community, and they get nothing [back].”

She found out about small business bonds from a podcast, the Good Food CFO, and researched a variety of bond exchanges. Her chosen venue, the SMBX (Small Business Exchange), set her up with a 10.5 percent interest rate repaid over 36 months. $20,000 is required to fund the bond, while $60,000 is the target amount; a prospectus and SEC filings are available to view. The funding deadline is July 26 at 7 p.m. If the bakery doesn’t have $20,000 at that time, the bond doesn’t get funded.

Since the bond is an investment on an exchange, complete strangers can research the bakery. In fact, Daniels says a majority of Hippos and Hashbrowns’ investors are strangers who see bakeries as steady, reliable businesses. Relatively few of her friends and regulars have signed up—perhaps deterred by the SEC’s requirements for investors. (You don’t have to tell GoFundMe your social security number.)

Daniels says her goal is to consolidate construction debts from the opening of the bakery’s new retail storefront. If she can pay those debts now, the bond represents one predictable bill a month, rather than a mess of various debts with different rates and timings. Like microloans, small-business bonds have very low default rates so far, because business owners tend to use them responsibly for small projects like these.

Daniels is one of the very first bond-issuing food business owners in Dallas, so there’s an element of experimentation to all of this. If it can work for Hippos and Hashbrowns, though, others might follow. And food businesses elsewhere in the United States have used the system; an acclaimed Asian restaurant and night market in Washington, D.C., used the SMBX to build a covered outdoor patio. Eater has profiled a California bagel business that raised funds through bonds. (A small correction to that Eater piece: the law passed in 2012; it took the SEC several more years to implement all the rules.)

For Daniels, meanwhile, I had just one more question. Can our investment interest be repaid in cookies?

“You know it,” she answered with a laugh, but the truth is a little more complicated. “Everything has to be regulated by the SEC—but I thought to myself, it seems like there should be some kind of reward party. It’s in my head. I don’t know. I’m kind of toying with the idea. If we fund, do we have a thank-you party?”

There’s only one way to find out.

Hippos and Hashbrowns, 2349 Gus Thomasson Rd.

Author

Brian Reinhart

Brian Reinhart

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Brian Reinhart became D Magazine's dining critic in 2022 after six years of writing about restaurants for the Dallas Observer and the Dallas Morning News.

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