The tight lending market has impacted smaller firms and compelled some business borrowers to look elsewhere for capital. As interest rates have risen and banks have pumped the brakes on lending, online platforms – including funding portals, have stepped in to take the place of banks for some companies
Today, WSJ.com (the Wall Street Journal) has written about the phenomenon, which has actually been in place for many years. Under Regulation Crowdfunding (Reg CF), from almost the beginning of the JOBS Act exemption, platforms have offered debt securities, giving smaller firms a choice beyond a local bank.
In the early days, NextSeed, eventually acquired by Republic, was one of the first bank replacement platforms. Today, there are a handful of other platforms that specialize in debt, like Honeycomb Credit or SMBX, while some platforms, like Wefunder, offer both debt and equity securities.
The WSJ.com article provides an anecdotal experience of Palm City Wines, which was unable to tap into its banking partner for credit after a first SBA-supported loan. They had “no more collateral to offer.”
This was even while Palm City Wines was reportedly booming. The company needed $250,000 to open another store and decided to utilize SMBX to raise money with a “small business bond” that eventually closed to over $400,000 – far more than originally anticipated. At least some of their lenders were their customers who funded a loan generating a 9.5% interest rate. It is interesting to point out that the article reports that the default rate on SMBX is about 1% – which is pretty amazing.
While the original authors of the JOBS Act of 2012, the legislation that legalized online capital formation, probably did not foresee platforms becoming bank alternatives, providing choices for borrowers is probably a good thing – especially in a difficult economy. Banks, as we all know, can be exceptionally risk-averse – at times, denying loans when the overall economy needs it the most. Individual investors investing in a product or service they know, and love provides a two-fold benefit. First, the company gets the capital they need, and second, they get a consistent brand ambassador that has a vested interest in the success of the firm.
Now, if only Congress can review the existing regulations and improve upon the success by making a few changes. Perhaps, starting with raising the Reg CF exemption to $20 million (from its current $5 million funding cap)?
Regardless, it is a nice article promoting the benefits of securities crowdfunding. Hopefully, policymakers take notice.