They went around banks, local traders turned into ‘small business bonds’.

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

“It was a relief, to be honest,” said Gina Osumi, CEO of Probation Ribbon Cutting. “Preliminary sales are showing it’s going to be a great store and the neighborhood has welcomed us with open arms.”

What went awry was getting funding for the new store, especially for small businesses affected by the pandemic.

Instead of relying on conventional bank loans, Humphrey Slocombe managed to raise $250,000 from 180 individual investors to issue “small business bonds,” a 35-person San Francisco startup created by SMBX.

In the year In 2020, when Humphrey Slocombe was looking to raise money for a new Redwood City location, banks were turning them away. The lenders they called back offered money, but at exorbitant interest rates.

“Rather than banks, I prefer to borrow from those who believe in our business and are eager to support our business,” Ohsumi said. An additional bonus was that there was no need for personal insurance, a budget trap that can trap bright entrepreneurs in personal bankruptcy or foreclosure.

In the year The passage of the JOBS Act in 2012 opened up the ability for private companies to issue public securities. SMBX was established to provide access to capital without forcing entrepreneurs to give up equity. In the year

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

Lozano, who has spent more than 15 years in academia and describes himself as a “recovery finance professor,” is the son of a Southern California certified public accountant and has seen the difficulty of accessing capital for small and medium-sized businesses.

“Historically, small businesses that wanted to issue debt financing had only one option, whereas large corporations like Coca-Cola could issue bonds on the public market.”

Basically, a bond is a type of debt financing that takes out a loan from an investor to an organization – in the case of SMBX, small businesses – that is repaid with interest over a set period of time. In Humphrey Slocombe’s case, the business sold $250,000 in 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 originator then “undertakes additional due diligence checks to ensure, barring delinquency, that they are able to service the debt,” Lozano said.

watch out

Then the “bond” offers are available to anyone with a credit card or bank account to purchase. Investors have the ability to invest as little as $10 in a business, although most choose a variety of things: typical investors are business customers, locally minded people looking for a way to support their community, or experienced small business investors. Once the offering closes, the repayment plan begins, with investors guaranteed a certain return over the life of the bond.

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

So far, SMBX has not experienced any bond defaults, although Lozano recognizes that it is only a matter of time. Currently, the company is trying to avoid that possibility by carefully vetting the businesses listed on the platform.

What about Humphrey Slocombe? They’ve been busy developing flavors like Vietnamese Iced Coffee and Secret Breakfast (Bourbon+Corn Flakes) for Bay Area customers. But if you’re looking to get back into the hole for more capital, SMBX will be at the top of the list.

“I’m not sure if any loan can be considered fun, but if a loan can be fun, this is it,” Ohsumi said. “They’re getting the same amount of funding, but instead of the money going into a bank black hole, it’s real people getting paid.”

Kevin Truong can be found at [email protected].

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