Rejected by banks, local traders turn to “small business bonds”

After nearly two years of pandemic-related delays and disappointments, San Francisco-based “adult ice cream” company Humphry Slocombe finally opened its first, and fifth-ever, location on the Peninsula this week.

“Frankly, it was a relief,” said CEO Jina Osumi of the proverbial ribbon cutting. “The first few sales are showing that it will be a great store and the neighborhood has welcomed us with open arms.”

What went surprisingly well was getting funding for the new store, typically a hurdle for small businesses that falter in the pandemic.

Instead of relying on a typical bank loan, Humphry Slocombe was able to raise $ 250,000 from 180 individual investors by offering “small business bonds,” a new financial product created by SMBX, a 35-person San Francisco startup.

Store boss Brian Huebner delivers a Ht Fudge Parfait to a customer at the newly opened Humphry Slocombe in Redwood City, Calif. On Friday, July 29, 2022. San Francisco-based startup SMBX helps finance small businesses through alternative funding points. . | Don Feria for the Banner

In 2020, when Humphry Slocombe was trying to raise money for the new Redwood City location, banks were largely turning them down. The lenders who called them were offering money, but at exorbitant interest rates.

“Rather than from the bank, I’d rather borrow from those who believe in our business and are excited to support our business,” Osumi said. An added bonus was that there was no need for a personal guarantee, a tax trap that can ensnare optimistic entrepreneurs into personal bankruptcy or home seizures.

In 2012, the passing of the JOBS Act opened up the possibility for private companies to issue public securities. SMBX was formed to provide access to capital without forcing entrepreneurs to forgo equity. Since launching in February 2020, approximately 70 companies listed on the SMBX platform have raised over $ 6 million to support and expand their initiatives.

“Our vision was truly to create a new public market for small and medium-sized businesses,” said Ben Lozano, CEO and founder of SMBX.

Lozano, who spent more than 15 years in academia and describes himself as a “recovering finance professor,” has seen the difficulties small and medium-sized businesses have had in accessing capital as the son of a certified public accountant in the south. of California.

“Historically, small businesses that wanted to take out debt financing really only had one option, while large corporations like Coca-Cola can issue bonds on the public market.”

Basically, a bond is a type of debt financing that takes the form of a loan from an investor to an organization, in the case of SMBX’s small business, which is repaid over a defined period of time with interest. In the case of Humphry Slocombe, the company sold bonds worth $ 250,000 at an interest rate of 8% with a five-year repayment schedule.

Here’s how it works: Affected companies work with SMBX who analyze their financial history and develop a risk profile. Then the startup performs further due diligence checks to make sure that “in all likelihood, barring catastrophe, they will be able to service the debt,” Lozano said.

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From there, “bond” offers are available to anyone with a credit card or bank account to purchase. Investors have the option of investing as little as $ 10 in the business, although most opt ​​for a lot more – typical investors are corporate clients, people with a local mindset looking for a way to support their communities or investors. small business experts. Once the offer is closed, the repayment plan begins, with the investor guaranteeing a certain return over the term of the loan.

Store manager Brian Huebner serves customers at the newly opened Humphry Slocombe in Redwood City, Calif. On Friday, July 29, 2022. San Francisco-based startup SMBX helps finance small businesses through alternative funding points. | Don Feria for the Banner

SMBX charges an origination fee equivalent to approximately 4% of the total offer. The startup raised $ 15 million from investors including Group 11, Better Ventures, and the Impact America Fund.

To date, SMBX has not suffered any bond defaults, although Lozano acknowledged that it is only a matter of time. For now, the company is trying to avoid this possibility by carefully reviewing the businesses listed on the platform.

As for Humphry Slocombe? They are busy picking up flavors like Vietnamese iced coffee and secret breakfast (bourbon + cornflakes) for Bay Area patrons. But if they ever needed to go back to the pit for more capital, SMBX would be at the top of the list.

“I’m not sure if a loan could be considered fun, but if a loan could be fun, this would be it,” Osumi said. “You get the same financing at the same rate, but the money comes from real people who get paid off, rather than go into a black hole in a bank.”

Kevin Truong can be reached at [email protected].

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