SMBX – Small Business Bonds Marketplace Review
SMBX is an online marketplace that allows individual investors to buy small business financial securities. It can be difficult for some small businesses to get a business loan. With SMBX, a small business owner is taking a different route. In this case, they are raising capital from the public
This story originally appeared on MarketBeat
One of the many questions raised during the Covid-19 pandemic is how all of us can support the small businesses in our communities. These businesses are the engine of job growth and they have been the most affected by local, state, and federal mitigation efforts.
That's not exactly why the SMBX was created, but it's a timely use case that showcases the power that community can have in helping support small businesses. SMBX is a platform where crowdfunding meets fintech. It's an interesting concept that has the potential to be a game-changer for the way small businesses approach raising capital.
An Equitable Alternative to an SBA Loan
SMBX is an online marketplace that allows individual investors (that is everyday people like you) to buy small business financial securities. It can be difficult for some small businesses to get a business loan. With SMBX, a small business owner is taking a different route. In this case, they are raising capital from the public. Like a bank loan, the investors provide the local business with the capital they need. The business then pays the investors back with interest. In essence, the investors become the bank.
Investors provide capital to the business of their choice by purchasing small business bonds in increments of $10 at a time. The small business bond is a fixed debt instrument issued at $10 par value that yields principal plus interest on a monthly basis.
In some cases, the bonds are backed by the assets of the business. Other bonds are unsecured. Like any sort of debt, an unsecured bond will have more inherent risk.
Although bond investing is generally seen as carrying less risk than investing in stocks, they are not without risk. Investors need to do their own due diligence and should not invest more than they can comfortably lose.
A Win-Win For Small Businesses and Their Customers
Why would a business do this? The simple answer is because it can. The traditional SBA loan is time-consuming and burdensome for businesses. And with regulatory fees that get added in, businesses can find it difficult to manage their cash flow effectively.
SMBX is an avenue for raising capital that was previously unavailable. For a business the process is faster than getting a bank loan, it brings with it fewer regulations, and the business has smaller fees. A small business owner can also benefit from the free publicity that comes when they raise capital from their local customers.
And small business bonds are debt instruments so the business retains 100% of its ownership.
Why would individual investors do this? This is perhaps the clearest example of voting with your dollars. Simply put, the SMBX allows consumers (who are also investors) to support the companies that they believe in. They can also now engage with the company in a whole new way because they are now, in effect, a business partner.
But idealism only gets you so far. Investors will also earn interest on their investments that average around 6.5%. For risk-averse investors, that's a pretty sound investment strategy, particularly since investors are not charged any fees.
The SMBX is Regulated Under Title III
The concept of participative finance is not new. In 2012, the United States Congress passed Title III of the JOBS Act. This authorized small and medium-sized businesses, investors, and funding portals to participate in Title III securities offerings. As one such funding portal, the SMBX is governed by the rules and regulations established by the Securities & Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA).
SMBX Does Some of Your Due Diligence For You
Because these are not publicly traded companies, prospective investors do not have as much access to financial information as they would in traditional equities. However SMBX does analyze a company's information for such things as debt service coverage (does the company have enough income to pay its debts), its debt-to-equity ratio, and working capital ratio. All of these factor into the range of yields that SMBX will set for a business.
They will also look at qualitative factors such as financial trends, who are the company's competitors, the management tenure, and even customer and vendor reviews.
How to Get Started With SMBX
Any investor familiar with trading apps such as Robinhood or Webull will find SMBX to be easy to navigate. However, here's a brief tutorial for the beginner.
The first step for investors is to create an account on the SMBX website . New investors can also create an account by downloading the SMBX mobile app.
Now you're ready to invest. First, you can scan the site to find a business of interest. Here's where you can get an idea of the company's goals and vision. You can also learn more about how they plan to reach those goals. Remember, these are not publicly traded companies so there will not be as much detailed financial information as you would get from a company that is required to submit forms to the SEC.
When you find a small business of interest, you can reserve bonds at the lowest yield. Or you can place a bid for a higher yield (this is similar to eBay). When you make a bid, you will provide funds that will be placed in escrow until the auction closes.
In some cases, there will not be enough bonds for every investor. That means you can be outbid.
After the auction closes, the bonds are filled at the rate of the last successful bid. If you were a successful bidder, the money that was in escrow will now be deployed to pay for your bonds. You will begin to receive principal and interest each month until the bond matures. Funds are paid to your SMBX account (SMBX Book).
If your bid was unsuccessful, your money will be credited back to your SMBX Book for you to either withdraw or use to place another bid.
Demystifying an SMBX Auction
Company XYZ is seeking $2,000 through bond issuances. It is proposing to auction 200 $10 bonds within a range of 6% - 8%. (Note: Businesses can raise between $100,000 and $1,000,000 dollars).
As noted above, investors can either buy bonds immediately at the lowest yield offered by the company (in this case, 6%). Or they can bid within a pre-set range of yield (in this case as low as 6% but no higher than 8%).
So for example:
- Investor A bids for 80 bonds at 6.0%.
- Investor B bids for 80 bonds at 6.5%
- Investor C bids for 80 bonds at 7.0%
- Investor D bids for 80 bonds at 7.5%
In this example, Investors A, B, and C will be awarded bonds at the offering yield which is the highest successful bid of 7%. Investors A and B will receive 80 bonds each and Investor C will receive 40 bonds. All will get the monthly payments at the uniform yield of 7%.
Over 96% of Capital Raised Goes to the Business
When we invest in a charitable cause we like to know how much of our donation will actually be going to the charity? In a similar vein, it's good to know how much of their investment capital will be going to support the business an investor selects? In the case of SMBX, 96.5% of the raised capital goes to the business. SMBX will charge a 3.5% service fee for the total capital raised. Additionally, there is a $100 annual maintenance fee that is charged to the business until the bond matures.
And that same transparency is also a benefit to businesses because there are no hidden fees that depend on interest rates.
The Bottom Line on the SMBX
Real innovation often takes place under the radar. The SMBX is a straightforward way for small and medium-sized businesses to quickly raise capital. The service is still in its infancy. As more businesses become aware of the platform it is likely to expand. As an investor, you can spread the word to your favorite small businesses to see if they can tap into this convenient source for raising capital.