Since the founding of our country, small businesses have formed the backbone of our economy. Initially, people invested through informal networks that helped create and expand industries. As companies prospered, they also created new ways for people to buy, sell, and invest in small businesses. The federal government recognized the importance of these ventures. So, it enacted laws and tax breaks to encourage further investment from the private sector. If you are looking for new opportunities, these incentives and tax benefits for investing in small businesses could prove profitable for your portfolio.
Reasons for Investing in Small Businesses
Supporting small businesses is an important way you can invest in the local economy. Here are a few more reasons why you should consider backing local business owners and entrepreneurs in your community.
- Small businesses create jobs.
Small businesses are more than a small factor driving the American economy. According to the Small Business Administration, they are responsible for approximately 65% of new jobs created since 1995. Furthermore, they employ nearly 60 million Americans, which is approximately 47% of the total workforce.
Additionally, small businesses offer greater diversity within the job sector. While large chain stores hire plenty of cashiers, clerks, and warehouse staff, small businesses have more specialized needs. They hire more skilled laborers such as accountants, consultants, graphic designers, and technical workers. Having greater professional diversity makes the local economy stronger.
- Investing in small businesses builds up the local community.
Since you know who you are doing business with, there is a greater sense of trust and better customer service. In turn, many small businesses also give back to their local community. Small business owners regularly contribute to neighborhood schools, homeless shelters, community outreach programs, charities, and other nonprofit organizations. When you support small businesses, you are helping to build your community as well.
- Small businesses need support now more than ever.
While entrepreneurship embodies the American dream, small business owners will never achieve it without your support. With more banks getting out of the small business lending market due to increased regulations, it is becoming more difficult to raise capital.
The problem of the lack of funding has also been further compounded due to the pandemic. Many businesses are struggling to stay afloat as they contend with social distancing regulations and fewer in-person interactions with customers. This is why business owners are searching for new ways to engage the public.
Tax Benefits for Investing in Small Businesses
In addition to the community benefits, there are also tax benefits for investing in small businesses. After the mortgage crisis, the federal government initiated new tax benefits for investing in small businesses. With Qualified Small Business Stock (QSBS), investors can exclude a percentage of gains from selling shares of certain types of companies from federal taxation. This is extremely beneficial to investors in startups because there is greater potential for returns after taxes when you cash out your investments.
As with all tax exemptions, there are stipulations that apply. You can exclude 75% if the stocks were acquired between February 17, 2009 and January 1, 2011. However, if your shares were acquired outside this time period, the gain exclusion is between 50-60%. If you are uncertain about your holdings, you should consult with your financial advisor to see if you qualify.
A New Way to Invest in Small Businesses
Once you decide to invest in a small business, the next step is choosing your investment vehicle. The SMBX platform is an innovative investment platform that gives small businesses direct access to individual investors. It uses regulation crowdfunding, so private investors can skip the middleman and support the small businesses of their choice. Their business model is built on the idea that you get to “be the bank” and help raise capital for small businesses.
Instead of relying on bank loans to keep their doors open, small business owners can generate capital by selling debt-based financial assets. When you purchase small business bonds, you (the investor) loan money to the small business (issuer) for an agreed upon length of time. In turn, the business now has a financial and legal obligation to repay the value of the bonds plus interest back to its investors.
When you invest through SMBX, it creates a win-win scenario for all involved. Small businesses get the funds they need without involving the banks. In return, you get greater control over where and how you invest your money.
Benefits to the SMBX Platform
Small business bonds create new opportunities and have transformed small business debt. Companies no longer need bank loans. Instead, they can directly engage and interact with individual investors.
There are also less regulations and fees associated with these types of assets. Furthermore, investors can choose where they invest their money and affect change in their own community. In addition to the tax benefits for investing in small businesses, you can support ones that share your beliefs and business ethics.
Investing in Small Businesses with SMBX
One of the first things I noticed when I accessed the SMBX website was that it welcomed all non-accredited investors to join. As I continued to browse the site, I found it simple to navigate. The interface was easy to understand and extremely user-friendly.
Before I purchased my first Small Business Bonds, I wanted to make sure and read all the fine print. I was pleased to learn that there are no fees and I could begin investing with only $10. Returns vary depending on which offering you choose, but on average they usually yield about 6.5%. What finally solidified my decision was the fact that I am free to withdraw or reinvest your earnings any time. Even if I change my mind after an order is confirmed, I still have 48 hours to cancel and update my orders.
After reviewing the available offerings, I purchased bonds with ChildWise, a company dedicated to early childhood education. As a teacher, I was excited to support their mission to create quality content and training programs for educators, parents, and caretakers around the world.
Not only do my values align with their long-term goals, but it also seems like a financially sound investment. The bonds are estimated to have an 8% yield, showing the most growth in the Chinese market. As the world becomes more connected, I feel it is important to have exposure to global markets. In addition to supporting a worthy cause, I can also look forward to profitable returns.
The Bottom Line
Small businesses are an important part of the local and national economy. In addition to gaining greater control over your money, there are also significant social and tax benefits for investing in small businesses. With innovative platforms such as SMBX, startups and smaller ventures can now engage and connect with investors in their own communities.