This is a review of SMBX, all opinions are my own.
With participative economy growing at full speed, and the likes of Uber and Airbnb replacing your traditional taxis and hotels, it was only a matter of time before finance became participative as well. So can you be a bank? Turns out it’s pretty easy.
There are a lot of projects out there, from P2P loans to real estate projects, and even social investing abroad on sites like Kiva. Today, let’s take a look at SMBX, who offers a way to invest in a local business, with higher expected returns than your traditional bank.
SMBX is a marketplace where you can buy Small Business Bonds $10 at a time. A Bond is like a loan that a business takes to keep growing. Some Bonds are backed by business assets, other are unsecured.
As usual, higher returns mean higher risk, so if you decide to move forward, do your own research, and only invest money that you can afford to lose, or at least have locked up for longer term. This is not a place to park your emergency fund!
How does SMBX work?
SMBX is offering a way to invest in local small businesses through their app and website.
Investments start at $10, and in a similar way as crowdfunding, you just browse through projects to find the ones you would like to participate in.
You can create an individual account, or invest as a company, foundation or institution. You just need to be over 13 years old.
Signing up is pretty easy, you need to disclose your salary and net worth, and confirm you understand the funds may not be recovered, and you can’t resell your investment, which takes us back to my initial warning of not investing more than you can afford to lose.
One email verification later, I am ready to link my bank account. The credit card option charges an extra 4%, and I’d rather my money go to my investment than processing fees.
Linking my bank account was super easy because SMBX uses Plaid to interact with my online banking, so there was no scrambling for my account and routing number, verifying with a small deposit… welcome to 2021!
I opted to keep my investment activity private, but like a social media platform, you can share what you do and see what others do. I like my privacy, but I’ll let you know my first moves 🙂
Right now, in the bonds section, I am presented with 15 different investment options. My first thought is that’s not much, especially after seeing that only 5 are currently open. The other 10 are marked as completed.
So not much to pick from, but if the platform does grow, I would like to have a way of sorting them by amount requested, interest rate offered, percentage completed, sector etc… and it would be nice to also sort them by area on a map, since helping local businesses is quite attractive, I could even visit and do local due diligence, rather than invest in a business on the other side of the country.
But before looking at the open projects, I want to see the track record of the ongoing ones. Here is a beer company based in Oakland, CA.
The site tells me they raised $35,000 as a 36 months loan that will yield 10% for investors. They have made 9 payments so far. With the money, they bought a car, some equipment, and invested in marketing. I can see that 4 people must really believe in the project, because they invested over 10% of the loan, with the higher participant investing 6,560. I hope they diversified across more loans!
On the bond documentation, I see that the only collateral for the $35,000 loan is a $22,000 new car, that the company would be contractually obligated to sell if they default. I wonder if SMBX holds the title until the loan is repaid.
But it shows you that in case of a default, it is likely you would not get all your funds back. Litigation would probably not be worth it for such a small amount. That explains the high 10% interest rate offered by the platform to compensate investors for the risk they are taking.
Now I wonder how many investors who put in less than $100 are willing to read 14 pages of bond documents? The fact that I got kicked out of the site for inactivity before finishing my readings make me think the vast majority will just invest because the project looks fun. Cool, but know there are risks. SMBX is regulated by FINRA, so that gives me more confidence, but this is still a high risk vehicle.
So instead of putting all my eggs in the same basket, I decided to invest $10 in the 5 open projects.
The first one is a Cajun food company, who has been in business for 5 years, and is already selling at over 5,000 supermarkets.
They’re refinancing higher interest debt to free up some cash flow instead of paying interest. The interest they will pay investors is 8%, with SMBX’s spread on top, they are probably borrowing at 10-12%, which makes me wonder how much interest they are paying right now. The prospectus is again 16 pages, and discloses they pay up to 29%, including a bunch of credit cards at 19.99%, but it looks like a good business with solid social media following, a distribution network, so I am giving them the benefit of the doubt. Many business owners are good businessmen but not very financially savvy.
Once my order is confirmed, I am reminded that it will go through only if the company raises the needed funds by the close date, in a couple of weeks.
Next is a project that wants to scale up their production of vegan cheese. Not my alley, but I know there is a strong market for that. The loan is 50% secured against the equipment they will buy with the funds.
The interest rate is slightly lower, but it should be easier to recoup the funds in case of a default. Or maybe we’ll get a pound of vegan cheese.
I also invested in a 24 hour truck service company on the East Coast, an English and Mandarin bilingual early childhood education program, and an Instagrammable ice cream shop in San Francisco.
Now time will tell if my diversification was wise, or if I should have gone deeper into due diligence to assess the risk of each project, and applied a weighed allocation instead.
Closing thoughts on SMBX
I think this is a fun investing platform, which is easy to navigate, and definitely has some great pictures and graphics for the businesses they showcase.
The interface is quite intuitive, and I was able to invest within minutes.
As usual with peer-to-peer lending, it takes a few months or more to assess whether the projects are solid, and if the company behind just pushes projects to fill up their platform, or really vets businesses and their plan to grow and repay their loans.
While I wish I had more options in terms of loans and projects to invest in, I’d rather see a small number of thoroughly vetted projects, rather than a marketplace where any business can create a profile and request money.
Again, it would be nice to have a way to sort through projects, geographically or by metrics, to navigate the interface easier.
I did enjoy the story behind the projects, and I think that is often what makes a great business. A passion and labor of love from the founders. I like being able to vouch for these projects with my capital, rather than buy yet another slice of the S&P500.