Rejected by banks, local traders turn to ‘small business bonds’

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

“Honestly, it was a relief,” CEO Gina Ohsumi said of the proverbial ribbon cutting. “Early sales show this is 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, which is usually a stumbling block for small businesses shaken by the pandemic.

Instead of relying on a typical bank loan, Humphrey 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 manager Brian Huebner hands a Ht Fudge Parfait to a customer at the newly opened Humphry Slocombe in Redwood City, Calif., Friday, July 29, 2022. San Francisco startup SMBX helps finance small businesses through alternative funding sources. | Don Feria for Standard

In 2020, when Humphrey Slocombe wanted to raise money for the new Redwood City location, the banks largely turned them down. The lenders who called them back offered money, but at exorbitant interest rates.

“Instead of the bank, I would rather borrow from those who believe in our business and are enthusiastic about supporting our business,” Ohsumi said. An added bonus was that there was no need for a personal guarantee, a fiscal trap that can trap optimistic entrepreneurs in personal bankruptcy or home foreclosure.

In 2012, the passage of the JOBS Act made it possible for private companies to issue public securities. SMBX was created to provide access to capital without forcing entrepreneurs to give up equity. Since launching in February 2020, approximately 70 businesses listed on the SMBX platform have raised more than $6 million to help support and scale their ventures.

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

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

“Historically, small businesses that wanted to take on debt financing really only had one option, whereas large corporations like Coca-Cola can issue bonds in 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 Small Business — that is repaid over a period of time with interest. In Humphrey Slocombe’s case, the business sold $250,000 worth of bonds at 8% interest with a five-year maturity.

Here’s how it works: Interested companies work with SMBX, who analyze their financial history and develop a risk profile. The startup then does additional due diligence to ensure that “in all likelihood, barring a catastrophe, it will be able to service the debt,” Lozano said.

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From there, the “bond” offerings are available for purchase to anyone with a credit card or bank account. Investors have the option to invest as little as $10 in the business, although most choose much more: Typical investors are customers of the business, local-minded people looking for a way to support their communities, or experienced small business investors. Once the offering is complete, the repayment plan begins, guaranteeing investors a certain return over the life of the bond.

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

SMBX takes an initial delivery fee equal to approximately 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 a bond default, although Lozano admitted it was only a matter of time. For now, the company is trying to prevent this possibility by carefully vetting the companies listed on the platform.

As for Humphrey Slocombe? They stay busy whipping up flavors like Vietnamese Iced Coffee and Secret Breakfast (Bourbon+Cornflakes) for Bay Area customers. But if they ever need to go back into the well for more capital, SMBX will be at the top of the list.

“I’m not sure if any loan can be considered delayed, but if a loan could be delayed, it would be this one,” Ohsumi said. “You get the same funding at the same rate, but the money comes from real people getting paid back, instead of going into the black hole of a bank.”

Kevin Truong can be found at [email protected].

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