FinTech offers small business bonds to fund growth

Small and medium-sized business (SME) owners looking to raise funds now have the ability to issue bonds to their everyday customers and tap into their “love factor”. The idea is that budding entrepreneurs can quickly find the funding they need to grow their business, while giving loyal patrons the opportunity to earn some extra cash in the process.

By offering bonds through the SMBX market, SME owners not only get financing faster, easier and cheaper, but they also enjoy the added benefit of forging deeper connections with the communities that support them, co-founder and CEO of SMBX Ben Lozano says PYMNTS in an interview.

For the vast majority, finding funding has always been a cold, abstract and disempowering process, Lozano said. And small business owners, if they needed cash, often had no choice but to head straight to their local bank and apply for a loan.

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“Financing has always been something that has happened for this new class of entrepreneurs,” Lozano said. “[With SMBX marketplace,] you do not ask for alms; you issue a bond to your customers and give them the financial opportunity to invest in your business. It’s this kind of community-driven empowerment effect that surprises us the most. »

When an SME issues bonds through the SMBX market, it is actually borrowing money in the form of a loan from its customers and other private investors. SMBX takes advantage of a 2016 federal law that allows unaccredited investors to invest in private companies, providing an alternative to the more familiar crowdfunding model.

The way it works is simple. SMEs in need of quick capital can approach SMBX and ask to issue bonds through its marketplace. SMBX reviews them to make sure they are sound, low-risk businesses. If they are successful, SMBX prepares all the materials and creates a marketing campaign to advertise the bond offering, both to the SME’s own customers and through its own network. Then, once the offer is closed, the SME receives the capital it needs and its backers obtain their bonds. After that, the company repays the loan at the agreed rate and the bondholders slowly but surely recoup their initial investments, plus some interest.

“So companies now have the ability to issue a small business bond to their customers, Instagram followers, etc., and those people can recoup the interest that would otherwise just go to the bank,” Lozano explained. .

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Customers can invest with as little as $10. Lozano said SMBX turns away more SMEs than it accepts, so potential investors have reasonable assurance that the companies they fund will repay them. But that doesn’t mean the deal is entirely risk-free.

“Touch wood, we haven’t had a blemish yet,” Lozano said. “And companies get free marketing through the public offering, so they should become even more robust. But flaws are inevitable, and the question then becomes: what happens next?

SMBX protects itself to the maximum. About 60% of bonds in its market are fully or partially secured, and Lozano said the company would use standard recovery processes if SMEs using its platform were unable to pay.

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Given the way SMBX markets its offerings, a large portion of obligations marketed on its platform tend to be in the food sector, with gourmet restaurants, food trucks and breweries particularly well represented. Lozano said it was not a conscious decision by his company to go after these kinds of businesses. On the contrary, retailers and restaurants tend to have a much larger social media presence and following than other types of SMBs.

“So your local mechanic, even if it’s a good deal, they’re unlikely to have a lot of following on Instagram,” he said. “While Super Belly Ferments, which turns salad dressing into probiotics, is very popular.”

A large fan base is important because while SMBX’s platform is open to anyone who wants to invest, most of its funds come from customers of SME bond issuers.

“It’s just a lot easier when the business has a strong digital presence, with customers that are fanatical about a business, when that business has a high ‘apprehension factor,'” Lozano said. “That said, we’re ready to help any small business reach their funding goals.”

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