FinTech Offers Small Business Bonds, Not Bank Loans to Fund Growth

Owners of small- to medium-sized businesses (SMBs) looking to raise some money now have the opportunity to issue bonds to their everyday customers and cash in on their “beloveability factor.” The idea is that budding entrepreneurs can quickly source the funding they need to grow their business, while giving loyal patrons the chance to make a bit of money in the process.

By offering bonds through the SMBX Marketplace, SMB owners not only obtain funding more quickly, easily and affordably, they also enjoy the added benefit of forging deeper connections with the communities that back them, SMBX Co-Founder and CEO Ben Lozano told PYMNTS in an interview.

For a vast majority, finding financing has always been a cold, abstract and disempowering process, Lozano said. And SMB owners, if they needed cash, often had little choice but to go cap in hand to their local bank and beg for a loan.

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“Financing was always something that happened for this new class of entrepreneurs,” Lozano said. “[With SMBX Marketplace,] you’re not asking for a handout; you’re issuing a loan to your customers and giving them the financial opportunity to invest in your business. It’s that kind of community-driven, empowering effect that’s most surprising to us.”

When an SMB issues bonds through the SMBX Marketplace, what they’re really doing is borrowing money in the shape of a loan from their customers and other private investors. SMBX is taking advantage of a 2016 federal law that lets nonaccredited investors invest in private companies, providing an alternative to the more familiar crowdfunding model.

The way it works is simple. SMBs in need of quick capital can approach SMBX and apply to issue bonds through its marketplace. SMBX vets them to ensure they’re healthy, low-risk businesses. If they pass, SMBX prepares all the paperwork and creates a marketing campaign to advertise the bond offering, both to the SMB’s own customers and through its own network. Then, once the offering closes, the SMB receives the capital it needs, and its backers get their bonds. After that, the company repays the loan at the agreed-upon rate, and the bondholders slowly but surely recoup their initial investments, as well as bit of interest.

“So, businesses now have the option to issue a small bond to their customers, their Instagram followers, etc., and those people can earn back the interest that would otherwise just be paid to the bank,” Lozano explained.

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Customers can invest with as little as $10. Lozano said SMBX turns away more SMBs than it accepts, so prospective investors have reasonable assurance that the companies they’re funding will pay them back. But it doesn’t mean the deal is entirely without risk.

“Knock on wood, we haven’t had any defaults yet,” Lozano said. “And the businesses get a free marketing pop out of the public offering, so they should become even more robust. But defaults are inevitable, and the question then is, what happens afterwards?”

SMBX protects itself as much as possible. Around 60% of the bonds on its marketplace are either fully or partially collateralized, and Lozano said the company would resort to standard recovery processes if any SMBs using its platform were unable to pay.

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Given the way SMBX markets its offerings, a great deal of the bonds marketed on its platform tend to be in the food business, with gourmet restaurants, food trucks and breweries especially well represented. Lozano said this isn’t a conscious decision by his company to go after those sorts of businesses. Rather, retailers and restaurants tend to have a much bigger social media presence and following than other kinds of SMBs.

“So, Dave’s Muffler, even though it’s a good business, it’s not likely to have much of an Instagram following,” he said. “Whereas Super Deli Foods, which is turning salad dressing into probiotics, is very popular.”

A big fan base is important because while SMBX’s platform is open to anyone who’s willing to invest, most of its funds come from the customers of those SMBs issuing the bonds.

“It’s just much easier when the company has a strong digital presence, with customers who are fanatical about a business, when that business has a high ‘beloveability factor,’” Lozano said.