I’m always on the lookout for unique investment opportunities, and I was recently introduced to SMBX, a company that facilitates investing in small business bonds. I love the idea of investing in small businesses I believe in and helping them compete against large established corporations.
Small businesses in America are essential to keep this our economies running, and who doesn’t like to root for the underdog? SMBX fills the void for small businesses and investors alike to secure funding for small businesses and sidestepping the normal process of applying for a traditional small business loan.
What Is SMBX?
SMBX was founded by Benjamin Lozano (a Ph.D. and former finance professor), Gabrielle Katsnelson (accountant and financial manager), Bhavish Balhotra (banking technologist), and Jackie Chan (former investment banker), who are all self-proclaimed fintech enthusiasts.
The founders were familiar with crowdfunding models for different industries, but they thought there was a disconnect between small businesses and investors. Additionally, they recognized that most specialized investment opportunities were available only to accredited investors and required a large amount of money to invest.
Thus, SMBX was created and allowed investors to invest in small business bonds with as little as $10.
Initially launched from the San Francisco Bay area, SMBX wanted to invest in small businesses available to every investor who wanted to help small businesses they believed in thrive. During their initial startup phase, SMBX raised $2.5 million in seed funding.
In addition to creating investment opportunities for everyday investors, the founders recognized an increasing desire for everyday people to choose where their money goes rather than strictly paying attention to the profit potential. If someone doesn’t agree with a company’s business practices, they can choose to invest in a different small business that aligns with their beliefs.
*SMBX is registered with the Financial Regulatory Authority (FINRA).
How SMBX Is Different Than Other Investment Platforms
SMBX is a Regulation CF company, also referred to as an equity crowdfunding platform. They focus specifically on small business debt targeting the Small Business Administration loan market.
Traditional platforms focus primarily on startup equity, revenue sharing of large corporations, or market term loans.
SMBX utilizes a Modified Dutch Auction (MDA) method of funding in addition to the Small Business Bond asset class they established. These bond auctions help both the investor and the small business get the best rates and returns.
Lozano describes their business model this way: “We underwrite businesses based on objective criteria to assign them a risk profile that’s defined by a range of interest rates, a 200 basis point spread, say between 6% to 8%. Investors can reserve bids at the lowest yield, or if they are yield sensitive, they can choose to bid at the higher end. It allows for gamification by way of market price discovery.”
Companies That Are Eligible To Seek Funding From SMBX
The SMBX model is not for start-up companies. Their model focuses on providing funding to help small businesses expand or restructure debt while minimizing investors’ risk. To do this, SMBX analyzes each business’s operating history to ensure they are profitable before any agreements are created.
SMBX focuses on the SBA loan market for a variety of reasons. If you know the SBA loan process, you are familiar with how inefficient the process is. There is a mountain of paperwork and lengthy wait times until a loan is approved and cash is transferred to the small business. In addition to the wait times and paperwork, the government tacks regulatory service fees and other financial additions that quietly and quickly increase the total loan repayment amount.
Because the SBA loan approval process has vetted these companies, the government has done much of the work for SMBX. Small business owners that have passed these processes are generally more stable, which means less risk for investors. In other words, they should be profitable businesses that can repay their outstanding bonds.
How Much Does SMBX Charge Companies Who Are Seeking Equity?
Each small business determines the amount of funding they need, which will be provided in crowdsourcing bonds. SMBX charges 3.5% of the total capital raised at the end of a successful MDA process.
In addition to this 3.5% fee, SMBX charges an annual $100 fee for the bonds’ life.
My Experience Investing With SMBX
I love the idea of crowdfunding models and thought it would be worth experimenting with SMBX.
SMBX describes its model as a new way to invest in local small businesses through bonds from their website.
Bonds are like loans, but instead of borrowing money from a bank, small businesses borrow money from investors in bonds. Small businesses repay investors with monthly payments to buy back the bonds with interest.
Exploring Small Business Bond Offerings
Without creating an account, I could browse through the businesses seeking funding from investors in the form of fixed-interest bonds. I could pull up information about each business from the marketplace to understand their business model, plans, goals, and financials.
Each small business offering showed how much money they were seeking and the interest rate assigned to the bonds (how much extra I would get back if I invested with them).
Individual Company Details
The initial small business that caught my eye was Humphry Slocombe, specializing in unique ice cream combinations in the Bay Area.
The investment page showed how much they wanted to raise and how long the bonds would be good for. Humphry Slocombe’s listing provided me with the following information:
- Minimum Raise – $250,0000
- Maximum Raise – $350,000
- Bond Duration – 60 months
- Yield – 8.00%
- Unit Par Value – $10.00
- Total Unit Value $12.17
This initial information told me how much they wanted to raise, and for each $10 I invested, the contract stated I would be paid $12.17 in return.
The minimum investment amount is $10, and the maximum is tied to your current net worth and annual income.
Company Story
In addition to the company bond information, each company shares a story unique to its brand. For Humphry Slocombe, they prepared a brief history about the founders and their progress since opening in 2008.
This was a nice way to provide more information about the small business and provide a unique insight into its founders.
Also, the story provided insight into why they were seeking funding and what it would be used for. For this particular company, they were pursuing small business bonds to refinance their debt and to fund the opening of a new location.
Financial Information
A cute story is nice and inspiring, but ultimately this is an investment, and it comes down to the company’s ability to pay me back. Small businesses are notoriously known to fail, which is why I was skeptical when I first found out about SMBX.
For perspective, according to the U.S. Bureau of Labor Statistics, roughly 2 out of every 10 small businesses in the United States fail within their first year. At the end of year five, only half of the small businesses have survived. The numbers continue to decline as you move past ten years, where only a third of small businesses are still in business.
To provide an in-depth look into each companies financial situation, SMBX provides detailed documents about:
- The bond prospectus
- The bond prospectus summary
- The issuer financial information
Here is the issuer financial information about Humphry Slocombe’s current status:
From the breakdown, you can make a more educated decision on whether you believe the company has the ability to fulfill its bond obligations.
The U.S. Securities and Exchange Commission information is also provided by SMBX.
The Sign-Up Process
After browsing the listings and the platform, I decided to try investing a minimal amount to see how the process works.
The initial sign-up was rather simple. The first step is to identify yourself as an individual or organization.
The second step involves creating your login information which is rather self-explanatory.
To create your investor profile, there is certain financial information SMBX is required to collect from you to remain in compliance with federal regulations. Because of this, your net worth and annual income figures are necessary to determine the maximum amount you are allowed to invest with SMBX.
After providing your financial information, you need to understand and agree to a series of disclosures. As you should already know, there are inherent risks with investing, and you should never invest more than you can afford to lose.
Even though these companies have passed the SBA loan application process, there is not a 100% guarantee they will repay their bonds.
My Initial Investment
After creating my account, I linked my bank account to SMBX so I could start investing. I decided to order 14 bonds from Humphry Slocombe at $10.00 per bond with an 8% yield. This came out to a total initial investment of $140.
While I understand this investment is not going to make me rich, I wanted to understand the process of investing with SMBX and purchasing bonds before I decide to invest more heavily.
The SMBX Platform
Currently, SMBX allows you to use their platform from desktop and their iOS app. Unfortunately, I am an android user which requires me to use their website since they have yet to develop an android app. Although I don’t get the opportunity to use the mobile application, the website is straightforward to use, and the material is presented clearly and concisely.
A Warning About Crowdfunding
I want to painfully clear that every investment is a risk. In particular, investing in small business bonds through SMBX is inherently more risky than investing in a large company on the stock market. Two-thirds of small businesses fail before ten years. This is a harsh reality. However, this increased risk is represented in the return rate on the bonds. A “guaranteed” rate of return at 8% is a terrific investment – if the small business doesn’t fail before your bonds expire.
Your employer-sponsored retirement plan or self-funded IRA should always be funded first. Investing in crowdfunding platforms like this should only be funded with the extra money you’re willing to lose. High risk means higher rewards, which is an appealing aspect of investing with SMBX and small businesses.
If you’re interested in getting started with SMBX and checking out the small business marketplace, click the link below.
