Summary: New laws give small businesses access to the capital they need to survive and give small investors a chance to get a good return on investment
Many small business owners are on the brink of having their American Dream dashed. In the wake of the coronavirus pandemic, entrepreneurs looking to grow their businesses find it hard to get a loan from traditional sources. This isn't the first time this has happened.
If there is one lesson that the 2007-2008 financial crisis taught us, it’s that lack of capital matters. Small businesses had less access to capital during the Great Recession than mid-sized companies and were slower to recover. This time around, your investment dollars could change that. You can help local businesses get the capital they need because now you don't have to be a big-time investor investing huge amounts to help. And you can get a good return on your investment while also diversifying your portfolio.
Back in 2012, Congress didn't agree on much, but they did agree on funding for small businesses. The JOBS Act was overwhelmingly approved with bipartisan support in 2012. It laid out a framework that would enable the average Joe or Jane to invest in small businesses as a way to steer more capital to growing companies. Before the JOBS Act, only institutions and the wealthy could invest in private companies. It’s important to note that it is often at this stage—before a company goes public — that much of the increase in a company’s value occurs. In 2015, Congress approved Regulation A+ (Reg A+), which is one way small businesses can now get funding from retail investors while offering those investors the chance to invest early in a growing company.
Many online platforms have since launched that enable average Americans to make an equity or debt investment directly into these private companies. Importantly, you need to determine how much risk you can handle. Though the reward may be more significant, private equity — better known as angel investing — is usually a riskier investment than private debt as the investment is not secured like a loan may be. Private debt is a broad category covering non-bank institutions that lend in a variety of ways to privately held companies.
Evaluating equity and debt investments in private companies can be time-consuming to do. Online financial platforms, such as Worthy Financial, make it easy to invest in private companies through a debt instrument. Worthy evaluates the risk of providing debt to growing businesses and offers loans to those who have the collateral to secure the funding amount. It funds these business loans by selling SEC qualified bonds using the Reg A+ securities framework. Proceeds from bond sales are primarily loaned to growing companies who offer collateral, such as inventory and accounts receivables, to secure the funds. While there is always a chance that a company won't pay back a loan, collateralizing the loan with assets of greater value than the loan amount helps ensure a way to recoup some or all of the loss.
It’s a win-win as the money from the sale of Worthy bonds helps fund the business loans while you, as a bondholder, get 5% fixed interest per year. You can invest as little as $10 without having to pay any fees and you can withdraw your money at any time without a penalty.
Your investment doesn't just benefit you, business owners, and their employees. By investing, you keep money circulating in local economies across the U.S. Research finds that the presence of small businesses benefits the community, from better physical health to greater community engagement. Local companies give neighborhoods their unique character and identity.
Now you, too, can be part of this.