For small- and medium-sized businesses (SMBs) in need of capital, bank loans are undoubtedly the first place they look. Alternative finance players, including online loan marketplaces and crowdfunding portals, are also gaining traction, while friends and family still remain a popular source for SMB owners, too.
The bond market, on the other hand, isn’t the most likely of places for an entrepreneur to seek financing. Typically seen as a low-risk, low-rewards instrument reserved for middle-market and large enterprises, corporate bonds offer the opportunity for businesses to remain private while raising money and diversifying debt.
Several years ago, however, SMBs began to show interest in the bond market, too. A 2013 Forbes article noted this trend emerging, especially in Europe, in the wake of banks’ pullback from SMB lending, though the explosion of alternative FinTech firms in the years since has largely pushed the bond market out of SMBs’ minds.
Now, Nxchange wants to bring the bond market back into the fold of the broader SMB financing landscape. Earlier this year, the Netherlands-based market secured a multilateral trading facility (MTF) license, which allows the company to collaborate with financial institutions (FIs) and various lenders, linking them to its securities trading software and allowing its SMB clients to list securities.
In a statement at the time, Nxchange CEO Marleen Evertsz noted that many companies find the traditional process of listing stocks and bonds too complex. That’s particularly so for SMBs, despite the benefits they can gain by raising funds from a range of sources.
“We’re seeing a growing demand among [SMBs] for alternative financing solutions,” Evertsz recently told PYMNTS in an interview. “Traditional bank financing is not always a possibility.”
Nxchange hopes to lower the barriers for SMBs to enter the bond market through its partnership with Dutch bank Rabobank. Earlier this month, the entities created Rabo&Crowd, a service that combines traditional bank loans from Rabobank with private investment via Nxchange’s stock exchange.
According to Evertsz, the solution provides bank-level due diligence, automation and transparency. For smaller companies that have traditionally relied on bank loans, private equity and venture capital funding, it links them to another source of capital.
“There are also pronounced benefits for investors,” Evertsz said. Banks can help existing and new mid-market clients access funding without having to take on the majority of funding (and risk) on their balance sheets, while private investors can also diversify their portfolios by gaining access to broader funding targets.
The Rabo&Crowd solution is currently operating in pilot phase, with Nxchange anticipating three to five businesses to join the platform and raise funds in the first quarter of next year, as the partners explore the best strategy to bring the tool to market.
As with the broader alternative finance market, there’s no guarantee that small businesses or investors will flock to such a solution. While the small business bond market has already shown some strength this year, analysts noted that SMBs may make the mistake of approaching the market without professional help, which would create difficulty for investors to obtain the information they need to make informed investment decisions.
According to consulting firm IR.on in a July article, more SMB bonds were issued in the first half of the year than previously expected, with 14 bonds issued by 13 firms, totaling an estimated $741 million. Yet, nearly half came from the real estate industry, signaling “an insufficiently balanced industry mix” that has plagued the SMB bond market in the past, IR.on noted.
The company also highlighted the challenge of this year’s SMB bond market regarding the emergence of companies deciding to issue bonds without guidance.
“Another trend of the year 2017 also continued,” IR.on wrote, “with little-known companies daring to place their issues directly in the bond market — i.e., without professional support from a bank or communications specialist.”
The company continued, “One thing is for sure: If you want to convince the capital market in the long term, you should not issue your bonds directly without assistance, as this entails substantial reputational and placement risks.”
Nxchange’s Evertsz said collaborating with banks addresses this pain point for SMBs. The company also offers a coach to businesses listed on Nxchange via the Rabo&Crowd solution so business owners can be guided through the listing process. This “assures the company passes a suitability test to be listed on a public capital market,” she said.
With the backing of bank and professional bond market expertise, SMBs that decide to go this route are sure to feel more confident about the process. Yet, the biggest benefit may lie with investors themselves, who can obtain the security of a regulated market and the assurance of financial professionals when making their investments.
With a minimum requirement of $114 to join the platform, private investors are also seeing a lower barrier to entry into the bond market, which can diversify investment portfolios while optimizing risk profiles, noted Evertsz.
“Anyone with an interest to invest in these companies will now have the opportunity to invest,” she said regarding the Rabo&Crowd solution. “Companies that, historically, could only be funded by private equity investors, venture capitalists or high-net-worth individuals are also available to a broader investment public.”