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All investors need to evaluate which investments are right for their financial situation. While this article presents things you’ll want to look out for during the investment decision process, we do not offer investment advice; it is up to each investor to speak with your financial advisor and evaluate each investment opportunity for yourself.
If you’re just getting started in investing or you’re looking for something new and different, SMBX small business investments might be the move for you. There are a variety of small businesses to choose from, you can get to know them thoroughly, and your investment can make an impact on local economies.
Small businesses account for nearly 44% of the gross domestic product in the United States, and traditionally, they’ve been supported by banks lending to them. But as the Wall Street Journal reported recently, small businesses are now feeling the credit crunch as banks are prioritizing large business lending. Small Business Bonds™ level the playing field by providing financing while allowing communities to get involved by investing directly in their businesses.
But how do you determine what makes a good small business investment opportunity for you? You’ll want to consider a few things before you take the plunge.
Understanding the Asset Class
Everyone knows about stocks and bonds, but they look a little different when getting into the private market. Equity investments are akin to stocks and mean that you own a proportional share of a company, which comes with all the ups and downs that can accompany its fate. Unlike publicly traded stocks, equities may or may not be tradeable. Debt investments, which can include bonds, revenue sharing notes, and other vehicles, mean that the company owes you for investing, and you know exactly how much. Similar to equities, in the private market, debt investments may or may not be tradeable.
The Small Business Bond™, developed by SMBX, is a new asset class for private market debt investments. SMBX acts as a marketplace for small businesses to issue Bonds directly to a community of investors. For businesses, the process of issuing a Bond can be more beneficial than working with a bank since the funds are more easily accessible, their local communities get involved and earn interest, and customers can become lenders with a vested interest in the company’s success. Investors, meanwhile, can support their favorite local businesses and keep their money at work in their own community.
With fixed interest rates and a set payback period, Small Business Bonds™, while not risk-free, allow you to know exactly what to expect from your investment. Small Business Bonds™ can provide nearly instant — well, roughly a month later — cash flow from your investment as you start to receive principal and interest payments. Most other bonds make only monthly or quarterly interest payments with a final repayment of the principal at the end of the bond period. SMBX Small Business Bonds™ pay regular payments of both interest and principal.* You can also reinvest your payments to harness the power of compounding, which can be a powerful strategy for longer term investments.
Return on Capital
Risk and return are often offsetting ideas. You need to determine what level of return you want and whether you can stomach the risk that comes with it. If you can’t, it’s time to lower your return expectations. Small Business Bonds™ are not guaranteed, so investors will need to make sure they are comfortable with the risks associated with investing.
SMBX keeps the minimum investment small so you can build a portfolio based on several small businesses. Many SMBX Bonds pay higher interest rates than other types of bonds. While traditional bonds generally pay 5% to 6%, SMBX Bonds can pay up to 10%.* Compounded over the life of your investment, that additional 4% to 5% can make a huge difference.
Let’s say you wanted to invest $100. Or how about $1,000? SMBX gives you an estimated total return on your investment:
Small Business Bonds™ pay back both principal and interest throughout the life of the loan. Over time, as your investment goes down, so does your risk.
Who’s Behind the Business
Who’s running the place? You’ll want to investigate the management team of any small business you’re considering to provide insight into the team’s industry experience and past successes (or failures). A history of growing multiple small businesses or many years owning one small business can be a positive sign.
When you invest in a small business on SMBX, you’re able to see and evaluate who you’re backing. Businesses provide company profiles and founder profiles, along with statements regarding the planned utilization of the Bond funds. This gives you key insights into the motivations of the company requesting the money.
While the above information is available front and center on a business’s SMBX offering page, you can also dig deeper by downloading the company’s Bond prospectus and financial documents, conveniently linked on the offering page.
Financials
Evaluating the business’s financials provides valuable insight into the potential future earnings of a company and can help in valuing potential investments and ascertaining risk levels.
SMBX’s underwriting team holistically reviews businesses who want to raise capital on the SMBX based on standardized criteria for risk, and only qualifies those businesses who meet those minimum criteria.
Though SMBX reviews each listed business, the onus is on investors to make their own investment decisions. Investors are provided with a prospectus and financial documents, allowing you to make your own informed decisions by reviewing the company’s information prior to investing. You can evaluate each investment opportunity to determine whether the company, the interest offered on the Bond, and the length of the Bond fit your investment goals.
To access a company’s prospectus and financial documents, click on “Start Investing” on the SMBX website and choose a potential investment, then scroll down past the main image and click on “Documents” (in the iOS app, it’s linked at the bottom of the page). You can download the Bond prospectus in full or a shortened summary version. In the financial documents link, you’ll see the SEC filing documents, including balance sheets, profit and loss statements, and statements of cash flows. Reviewing these documents will help you make a decision on whether the investment is right for you.
Keep in mind that all investments come with risk, and returns do not always vary along with those risks.
Ready to Get Started?
Investing in small businesses allows you to keep your investment money local and support your neighborhood economy, while earning passive income*. When evaluating SMBX small business investment opportunities, you’ll want to understand the asset class, return on capital, founders, and financials to determine if the investment is right for you. While some investors may choose to invest only in a single business, others will diversify by spreading their money over multiple company offerings in a variety of industries and locations.
If you’re ready to get started, visit the SMBX investment center to see all available Small Business Bonds™. And if you have additional questions, give our FAQs a browse or email us at support@thesmbx.com.
*All estimated returns on principal + interests are not guaranteed. The statement is based on the following assumptions: 1) an offering successfully closes and an investor is allocated a Bond or Bonds, 2) that the investor holds their Bonds to maturity and 3) that there are no defaults made by the issuer on any of the Bond payments from issuance to maturity.