Turned Away at Banks, Local Merchants Turn to ‘Small Business Bonds’


After around two years of pandemic-related delays and disappointments, San Francisco “ice cream for adults” company Humphry Slocombe finally opened up its first location—and fifth overall—on the Peninsula this week.

“Quite frankly, it was a relief,” said CEO Jina Osumi of the proverbial ribbon cutting. “Early sales are showing it’s going to be a great store and the neighborhood has welcomed us with open arms.”

What went surprisingly smoothly was getting financing for the new store, typically a stumbling block for small businesses reeling from 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 novel financial product created by SMBX, a 35-person San Francisco startup.

Store Lead Brian Huebner hands a Ht Fudge Parfait to a customer at the recently-opened Humphry Slocombe in Redwood City, California, on Friday, July 29, 2022. San Francisco startup SMBX helps small business financing through alternative funding outlets. | Don Feria for the Standard

In 2020, when Humphry Slocombe was looking to raise money for the new Redwood City location, banks were largely turning them away. The lenders that were calling them back were offering money, but at exorbitant interest rates.

“Rather than the bank, I’d prefer to borrow from those who believe in our business and are enthusiastic for supporting our business,” Osumi said. An additional bonus was that there was no need for a personal guarantee, a fiscal trap that can ensnare optimistic entrepreneurs in personal bankruptcy or house seizures.

In 2012, the passage of the JOBS Act opened up the ability for private companies to issue public securities. SMBX was formed to provide access to capital without forcing entrepreneurs to give up equity. Since launching in February 2020, roughly 70 businesses listed on SMBX’s platform have raised more than $6 million to help support and expand their ventures.

“Our vision was really building a new public marketplace for small and medium-sized businesses,” SMBX CEO and founder Ben Lozano said.

Lozano, who spent more than 15 years in academia and describes himself as a “recovering finance professor,” saw the difficulties small- and medium-sized businesses had getting access to capital as the son of a certified public accountant in Southern 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 SMBX’s case small businesses—that is paid back over a defined period of time with interest. In Humphry Slocombe’s case, the business sold $250K worth of bonds at 8% interest with a five-year repayment timeline.

Here’s how it works: Interested companies work with SMBX who analyze their financial history and develop a risk profile. Then the startup does additional diligence checks to make sure that they’re “in all probability, barring catastrophe, going to be able to service the debt,” Lozano said.

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From there, the “bond” offerings are available to anyone with a credit card or bank account to purchase. Investors have the ability to invest as little as $10 in the business, although most opt ​​for much more: Typical investors are customers of the businesses, locally-minded folks looking for a way to support their communities, or experienced small business investors. Once the offering is closed, the repayment plan begins, with investors guaranteed a certain return over the course of the bond term.

Store lead Brian Huebner serves customers at the recently-opened Humphry Slocombe in Redwood City, California, on Friday, July 29, 2022. San Francisco startup SMBX helps small business financing through alternative funding outlets. | Don Feria for the Standard

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

To date, SMBX has not gone through any bond defaults, although Lozano acknowledged it’s only a matter of time. For now the company is trying to head off that possibility through careful vetting of businesses listed on the platform.

As for Humphry Slocombe? They’re staying busy scooping flavors like Vietnamese Ice Coffee and Secret Breakfast (bourbon+cornflakes) for Bay Area customers. But if they ever needed to return to the well for more capital, SMBX would be at the top of the list.

“I’m not sure if any loan could be considered fun, but if a loan could be fun, it’d be this one,” Osumi said. “You’re getting the same funding at the same rate, but the money’s coming from real people who are getting paid back, rather than going into the black hole of a bank.”

Kevin Truong can be reached at [email protected].

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