small business

Due to the pandemic, small businesses need our support now more than ever. As of September, nearly 100,000 small businesses have closed their doors for good because of COVID-19, and many more are struggling.

In an effort to help, we’ve all been donating to GoFundMe campaigns and ordering as much takeout as we can. But if you’re looking for new ways to support small businesses and earn a profit at the same time, consider crowdfunded bonds.

Nobody has heard of crowdfunded bonds, because they’re new. Title III of the 2012 Jobs act made them possible (here).  However, it has taken a while for the finance industry to have products suitable for small investors.  There are at least three companies in the crowdfunded bonds space: worthy, honeycombcredit, and SMBX.  Of these crowdfunded bonds companies, SMBX is the most interesting.  There isn’t much on it, so I decided to do a review here.  But first, here is an overview of crowdfunded bonds.

What Are Crowdfunded Bonds?

A bond is basically any interest bearing government or corporate security that obligates the issuer to pay bondholders a specified sum of money, at specific intervals and to repay the principle amount of the loan at maturity. Bondholders basically have an IOU from the issuer, but no corporate ownership privileges, as stockholders do.  Crowdfunded bonds are basically the same as regular bonds, but bond investors are smaller and pool their investing dollars to fund the bond purchases.  So basically, when you purchase a crowdfunded bond, you’re essentially buying a small piece of a business loan.

Why Should You Invest in Crowdfunded Bonds?

Crowdfunded bonds support small businesses, but they also have financial benefits for you as an investor. Here are the main reasons you should add them to your portfolio.

1) They’re Somewhat Safer Than Stocks

Crowdfunded bonds carry less risk than other assets like stocks. They also provide a set monthly income, so they’re a vital part of every investor’s portfolio. Investing in loans by purchasing bonds is safer than buying stocks because the company has an obligation to repay you to the best of their ability. If the worst happens and the business goes bankrupt, there’s a chance that you’ll get some of your money back as they liquidate their assets and reorganize their debt.

In many cases, people who own stock lose their entire investment if the company goes belly up. This makes stocks a riskier asset.

2) Crowdfunded Bonds Reduce Risk

Bonds balance the risk in your portfolio, which is why experts recommend them for every investor. As a general rule of thumb, the amount of stocks you have in your portfolio should be 100-your age.  So if you are 25, you should have 75% of your portfolio in stocks.  If you are fifty years old, half should be in stocks.  The amount of your portfolio not in stocks, should be alternatives like bonds and cash.

3) Relatively High Returns, Paid Out Monthly

Another great thing about crowdfunded bonds is that they provide a set return that’s higher than what you’d get from a bank account or CD.

The federal funds rate dropped to near zero last year, and won’t be increased until at least 2023. Because of this, returns on safer investment vehicles like CDs and money market accounts have been pretty low and will continue to stay that way.

If you’re looking for a way to increase your income without drastically increasing your risk, crowdfunded bonds are a great option. The bonds you buy on SMBX can earn you up to 9% interest, which is paid out monthly.

Shortly after the bond is funded, you’ll start receiving fixed principal and interest payments and generating income from your investment. You can spend the money, save it, or reinvest it to maximize your returns. In these unpredictable times, it’s definitely nice to have some extra money coming in every month.

The only downside of crowdfunded bonds is that they don’t have much liquidity. You won’t be able to sell or transfer bonds you buy through SMBX for at least one year. After that, there’s no guarantee that you’ll be able to find someone to buy it.

So you shouldn’t invest any money that you need constant access to and can’t afford to lose, such as your emergency fund.

How SMBX Supports Local Small Businesses

SMBX is the first marketplace that allows retail investors cheaply buy crowdfunded bonds. They connect small investors like you and me with local businesses that need access to affordable loans. Business owners who raise capital through SMBX pay as little as 4% interest plus a small processing fee.

They don’t have to sign a personal guarantee either, which means their personal assets won’t be on the line if their business fails. Many lenders require personal guarantees and charge higher interest rates, so SMBX is giving small businesses access to a better financing solution.

They’re also helping people of color and other entrepreneurs who are underserved by big banks get the capital they need to thrive. It’s part of their mission to create a more equitable economy, which is something I can definitely get behind.

SMBX bonds cost $10, which means they’re accessible for pretty much anyone who has a pulse. This also means that small investors, instead of big banks, can get access to high yielding bond opportunities.  Basically, they’re designed for the Jane and Joe average.

My Experience with SMBX

Investment platforms can sometimes be hard to navigate, but not SMBX. It has an attractive, user-friendly interface that makes signing up a breeze. The whole process took me under 15 minutes, so it’s easy to fit investing into your busy schedule.

First, you have to create an account by entering your name, date of birth, address, and email.

You’ll also be asked for your estimated annual income and net worth. If you’ve invested any money in crowdfunding over the past 12 months, you’ll have to enter that too. SMBX needs this info to calculate your investment limit.

Then you can connect your bank account or credit card to the platform and start investing. There’s a 4% surcharge on credit cards, but buying bonds with your bank account is completely free. I chose to link my bank account, which was super easy.

SMBX uses a data transfer network called Plaid that allows you to securely sign in to your bank account. I just had to enter my login details, account number, and routing number, and I was ready to go.

Investing in Crowdfunded Bonds with SMBX

Now for the fun part—picking which businesses you want to support!

SMBX currently has 15 different small businesses you can invest in. They add new bonds all the time, which allows you to keep expanding your portfolio.

Each small business bond has a dedicated page with lots of information about the company.

On the right-hand side of the page, there’s a quick bond summary with bond duration, yield, and the minimum and maximum amounts of money the company needs to raise. You can also see when the fundraising period is set to end and how much money has been collected so far.

Further down the page, there’s an about tab where you can learn more about the founders and how they started and grew their business. All of the stories I read were really inspiring and worth taking a few minutes to read.

There’s also a section about how they plan to use the funds to grow their operation and achieve their goals. I loved seeing how my investment would benefit the company and make a real difference.

Under the documents tab, you can access the bond prospectus, which gives you detailed information about the investment. There’s also a link where you can view the company’s financial information.

And if you’re short on time, there’s a handy summary of important details from the bond prospectus and the company’s financials.

Choosing a Bond

With so many worthy businesses to choose from, it’s pretty hard to decide which one to invest in. I spent a good 30 minutes reading each company’s story and learning about their products.

There was a keto cookie company, a minority-owned trucking business, and more, so it was a tough choice. But ultimately, I decided to invest in Jule’s Foods, a vegan cheese company based in California.

I eat a plant-based diet, so I always want to support small businesses that produce delicious food for people with dietary restrictions. I was also inspired by Julie and her husband Stephen’s story.

They decided to adopt a healthier plant-based diet after Julie was diagnosed with Stage 4 colorectal cancer. Now they share their lifestyle and love of fine foods with others through their business.

Another thing I like about this bond is that it’s partially secured by collateral. Half of the loan amount—approximately $100,000—is backed by the new equipment that Jule’s Foods is buying. They’re getting a new cashew grinder, equipment for their aging room, a walk-in freezer, and more.

Although I hope this doesn’t happen, there’s always a chance Jule’s Foods won’t be able to pay back their loan. In that case, they’ll sell some or all of that equipment and use the money to pay back their bondholders.

This means that the chance of losing my investment is much lower, which is part of what drew me to this bond. I’m not only investing in a company with a great mission, but also making a sound financial decision. It doesn’t get any better than that!

Buying a Bond

Once I decided which company to choose, the process of buying the bond was easy. You just have to hit the yellow button on the left side of the screen that says “buy bonds” and a separate window will pop up.

Then you can enter how much money you want to invest. Each bond costs just $10. So even if you don’t have a lot of spare cash, you’ll be able to invest. I chose to put in $50, which got me 5 bonds.

You’ll also be able to see the estimated return based on how much money you plan to invest. The bond I picked has a 7.5% interest rate with an estimated total return of $60.11 on my initial $50 investment. That means I’ll receive around $1 per month over the total duration of the bond, which is 60 months.

A few business days after the fundraising period ends, I’ll get my bond certificate and start receiving interest and principal payments soon after. I’m looking forward to seeing how my investment performs!

Wrapping Up

Buying local is really important during the pandemic. But if you want to support small businesses even more, investing in crowdfunded bonds is a great way to do it.

I thought signing up and purchasing my first bond was easy. I liked how much information SMBX provided to help me make a good investment decision and learn more about amazing local businesses.

It was pretty tough to decide which business to invest in, so I could definitely see myself making another investment in the near future. The bonds provide a high return of up to 9% and support awesome companies, so it’s really a win-win.

I’d highly recommend the platform to anyone who wants to invest in local American businesses to keep our economy and communities strong.

If you want to try out SMBX, you can sign up here. Let us know which crowdfunded bonds you buy!

For more great savingadvice article, read these:

Thirty Eight Ways To Make Money On The Side

Seventeen Bills In Your Wallet Worth More Than Face Value

Take The 365 Day Quarter Challenge And Save!

Should You Drive With The Gas Tank Full Or Empty?