A friend reached out to me the other day. We’ve traveled around in blogging circles since I started around 2006. Back then I was obsessed with peer-to-peer lending (P2P lending). I had convinced myself that I could lend money to people at 20%+ or more and make 15% on average after defaults. With the trusty exponent button on my calculator, compound interest of 15% quickly turned into enormous wealth. Unfortunately, many more people defaulted and most people were lucky to even break even.
It’s too bad because it seemed like a great idea to take the middleman (banks) out of the lending and borrowing process to make it a more efficient marketplace.
This friend wanted to tell me about a new idea. He admitted that it is a little like P2P lending, but more like crowdfunding for small business bonds.
So it works like this:
A small company decides that they need funding to grow their business. They explain how the business currently works and how this new money is going to increase profits. In some ways, you get to play Mark Cuban on Shark Tank. The difference is that you don’t buy ownership in the company and you can’t negotiate the terms. However, let’s face it, neither you nor I happen to be Mark Cuban* so we don’t have the money and influence to start trying to dictate terms. Instead, you get to be the bank, earning around 8% interest on your investment. This, like with all P2P lending, assumes that you are willing to take on the risk that the company will pay back its debt.
You might be asking yourself, “Should I be taking on this risk to earn 8%?” I don’t know of any risk-free ways to earn 8%. It can be challenging to earn 2% risk-free nowadays. With the stock market booming for the umpteenth year, many experts are suggesting that it won’t be able to grow much over the next several years – and it might crash. I humbly suggest that this investment may deserve a seat at the table with some of your other investments. After that consideration, you may decide that the following risks are too great:
1. The company you fund can go under.
2. The SMBX platform could go away.
3. The Feds could change the rules that allow this kind of investing.
I was able to reach out to the company and they told me that 60% of SMBX bonds have collateral behind them. That’s a lot better than the old P2P lending days when anyone could just walk away with a ding to their (likely already bad) credit score.
All that said I wouldn’t put too much of my money on this platform. However, after writing about bitcoin in 2011, I’ve promised myself that I would be open to putting down a small amount, such as $50 or $100 to see if it works out. Back then a $50 investment would have us living mortgage today. With SMBX, the upside is considerably less.
Nonetheless, I will own $50 of bonds on this Wing Food Truck.
Sometimes It Isn’t About the Money
When you buy a diversified mutual fund or ETF, you are investing in so many diversified companies. You have to take the good with the bad. Every company isn’t going to have the same values I have.
The greatest strength of that diversification is that I can invest in almost everything. I can even invest almost everywhere, even frontier ETFs.
SMBX allows me to invest in a completely different way. If I want to invest in minority-owned companies, I can do that directly. If I want to invest in women-owned companies, that’s easy too. If I want to invest in eco-friendly companies for Earth Day, that’s also an option. If I want to invest in businesses that are Mohawk-owned, I can do that.
You can invest in specific communities where financing may be tougher. You can literally make an impact on a small Mom and Pop business. I consider this to be the backbone of American business… and they need it now more than any other year in my lifetime.
Getting Started with SMBX
I was surprised how easy it was to get started with SMBX. The sign-up process was just a few pieces of information. I had expected it to take days to verify my bank and transfer funds. I was very surprised to find myself ready to loan in just a few minutes.
SMBX uses Plaid as its payment processor. Plaid almost merged with Visa in a deal that would be have been worth more than 5 billion dollars. That deal didn’t happen because of regulatory issues. I think the government thought that Visa would become too strong. In any event, Plaid is highly respected and considered as safe as any banking platform in existence. In other words, if it’s good enough for Visa, it’s good enough for me. Side note: A few days after signing up with SMBX, I created a Coinbase account and they used Plaid as well. So it’s good enough for $100 billion dollar companies like Coinbase.
You can get started with as little as $10. I like low minimums, but that might be too low. I guess if you are spreading $10 to a bunch of companies it can add up, but I think most everyone will invest more. Maybe it would be useful for my kids somewhere down the line. Right now there aren’t many companies that they would be interested in on the platform. In fact, there aren’t many companies overall on the platform. SMBX is relatively new and it needs time to grow to fulfill the promise of being able to offer very specific investing choices to potential investors.
So, what do you think, would you invest with SMBX?
* If you are Mark Cuban. Hi there, big fan!
I prefer real estate crowdfunding. That has solid collateral behind it.
Small business, who knows. It sounds better than P2P lending, but not by much.
Since most small businesses go bankrupt after a few years.
Lazy Man says
I agree that might be a better investment for the investor, but I like the aspect of helping out a community, perhaps your own local community (assuming they get enough traction). It’s got a little “shop local” in it, like “invest local.”