SMBX is a lending platform that enables anyone to invest in small, local businesses. With as little as $10, everyday investors can support local economies and earn a competitive interest rate of up to 9% paid monthly. These investments are made through Regulation CF—part of the 2016 JOBS Act, making it easier for people to invest in private businesses.

Let's take a closer look at SMBX and why you might want to consider becoming a lender. 

Benjamin Lozano, Bhavish Balhotra, Gabrielle Katsnelson, and Jackie Chan founded SMBX in 2016. With $15.2 million in seed funding, the team sought to make bonds more "retail friendly" and provide small businesses with an alternative to expensive and onerous conventional loans. Bonds offer better terms for businesses and better returns for investors.

SMBX provides lending opportunities through Small Business Bonds. Once an offering closes, investors receive the bonds and businesses begin making monthly interest payments. Each month, investors receive a portion of the principal plus interest for the bond's duration, assuming the company doesn't default or go bankrupt.

For instance, suppose that you invest $1,000 in a small business offering 8% interest and a duration of 48 months. You would receive monthly payments of $24.41 for 48 months for a total return of $1,171.82. From a tax standpoint, the interest portion of the payment is treated as regular income during the tax period that it's received.

SMBX's underwriting team helps review businesses based on standardized risk criteria. For example, the team will look at financial statements, tax filings, and conduct background checks on the owners and officers. This due diligence helps minimize the odds of fraud and default, providing some protection for investors.

There are no costs for investors on the SMBX platform, except for a 4% payment processing fee when funding your account via credit card. That said, SMBX charges businesses a 3.5% service fee on the total fundraising amount if successful. So, for example, if a company raises $100,000, SMBX charges the firm $3,500 when the offering closes. 

SMBX's Small Business Bonds are an excellent fixed-income source, but they don't offer equity's upside potential. As a result, investors may prefer SMBX as an alternative to conventional bonds or certificates of deposit, but they may not replace the equity part of a portfolio. Fortunately, there are varying levels of interest rates depending on your risk tolerance.

While bond payments usually have seniority over equity, there is still a non-negligible risk of default, particularly with small businesses. The good news is that SMBX's underwriting efforts help minimize these risks, setting appropriate interest rates given each business's cash flow and overall risk.

Interest payments on bonds are typically taxed at the ordinary income tax rate, which could significantly impact your after-tax returns. If you're in a high tax bracket, you may want to compare these after-tax returns with other options that fall under the capital gains tax rate to find the most attractive returns with everything considered.

Finally, SMBX is still relatively new with a limited track record, having started in 2016. With many bond repayments lasting more than a year, the company won't have a strong track record for some time. However, the company has seen a high repayment rate thus far.

SMBX is an excellent way to support small businesses through fixed-income bonds. With attractive interest rates, these bonds could provide investors with an impactful alternative to conventional bonds or certificates of deposit. However, investors should keep in mind that they may be riskier and upside is limited compared to equities.