Author Topic: Invest in local small business...feasible?  (Read 3910 times)

Dusty Dog Ranch

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Invest in local small business...feasible?
« on: August 06, 2015, 11:21:01 PM »
We live in a small rural community, with a struggling downtown area, like many small towns. Lately though, there has been some interesting entrepreneurial spirit cropping up. Meanwhile, we have some money sitting in CDs earning a measly 2%...if we could earn more interest while also supporting our local community (and getting a product and/or service that's currently lacking) that would be awesome.

Does anyone have experience with this? I haven't done much research, but it seems the options are to invest for equity, do an outright loan, or a hybrid equity/loan. Does one need an intermediary like Lending Club to make something like this happen? Any ideas for resources where i could learn more about our options? We aren't wealthy enough to be "accredited" investors, alas.

Dusty Dog Ranch

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Would you invest in a local small business by lending to the owners?
« Reply #1 on: August 07, 2015, 08:17:51 PM »
Any thoughts? I have an opportunity to do this in my small town, but I haven't found much on the forum to help me learn more.

FWIW, I haven't met these people yet; we have mutual friends, and i would love to have their store in our downtown.

I posted a longer version in the investor alley section...which i can't seem to link to...

lostamonkey

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Re: Would you invest in a local small business by lending to the owners?
« Reply #2 on: August 07, 2015, 08:26:33 PM »
There are two different questions that I think you are asking here:
1. Should I invest in a local store?
2. Should I lend money to a local store owner?

1. Maybe, it's impossible to give advice without seeing the store's financials.
2. I probably would not. It's not a great sign if they are not able to get a loan from a local bank. If I were to lend them money, I would likely require a very high interest rate to compensate me for the significant risk that they default on the loan.

protostache

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Re: Invest in local small business...feasible?
« Reply #3 on: August 07, 2015, 08:30:57 PM »
I think it depends a lot on the specific business and what they're trying to do, but there's definitely ways for non-accredited investors to participate.

Is there a specific business you're wanting to invest in? If they're currently raising funds and you're serious about wanting to participate, the best way to go is to get to know them and get ahold of their financials. Then, ask a few questions:
  • will the business be around in 5 years? 10?
  • what sort of profit will it be throwing off in that time?
  • do you trust the managers to not just run off with your money?

Argyle

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Re: Invest in local small business...feasible?
« Reply #4 on: August 07, 2015, 08:54:57 PM »
The chances of a business in a struggling downtown actually making enough profit to reward you for the amount of risk you're taking on ... well, I think the chances are low and the risks are high.  (I say this as someone with plenty of experience with struggling downtowns in rural areas.)  If you want a higher return, why not just put the money in an index fund?  I know you want to support local business but the chances are that what they really need most urgently is not capital but customers.  And if you want to support local business, do so with your consumer dollars, not with your savings.

Dusty Dog Ranch

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Re: Invest in local small business...feasible?
« Reply #5 on: August 07, 2015, 09:26:21 PM »

Is there a specific business you're wanting to invest in? If they're currently raising funds and you're serious about wanting to participate, the best way to go is to get to know them and get ahold of their financials. Then, ask a few questions:
  • will the business be around in 5 years? 10?
  • what sort of profit will it be throwing off in that time?
  • do you trust the managers to not just run off with your money?

Yes, there is and they are looking for capital through gofundme. Thanks for the great questions to ask. I am planning to meet with them to learn more about their plans and why they think it will suceed.

Dusty Dog Ranch

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Re: Invest in local small business...feasible?
« Reply #6 on: August 07, 2015, 09:45:11 PM »
The chances of a business in a struggling downtown actually making enough profit to reward you for the amount of risk you're taking on ... well, I think the chances are low and the risks are high.  (I say this as someone with plenty of experience with struggling downtowns in rural areas.)  If you want a higher return, why not just put the money in an index fund?  I know you want to support local business but the chances are that what they really need most urgently is not capital but customers.  And if you want to support local business, do so with your consumer dollars, not with your savings.

That's an interesting assumption about wanting higher returns; I wasn't really expecting this money (5k) to do that much...it's only earning 2% in a cd right now. I suppose on the face of it, it doesn't make a ton of sense to put fdic insured $ into a risky retail venture.

On the other hand, if a short term microloan could help them get to the point of actually having customers, assuming they have a strong plan and references...I don't know, I guess my desire for community development is vying strongly with financial logic. But this kind of input is super valuable, thank you!

Hamster

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Re: Invest in local small business...feasible?
« Reply #7 on: August 07, 2015, 10:08:08 PM »
The chances of a business in a struggling downtown actually making enough profit to reward you for the amount of risk you're taking on ... well, I think the chances are low and the risks are high.  (I say this as someone with plenty of experience with struggling downtowns in rural areas.)  If you want a higher return, why not just put the money in an index fund?  I know you want to support local business but the chances are that what they really need most urgently is not capital but customers.  And if you want to support local business, do so with your consumer dollars, not with your savings.

That's an interesting assumption about wanting higher returns; I wasn't really expecting this money (5k) to do that much...it's only earning 2% in a cd right now. I suppose on the face of it, it doesn't make a ton of sense to put fdic insured $ into a risky retail venture.

On the other hand, if a short term microloan could help them get to the point of actually having customers, assuming they have a strong plan and references...I don't know, I guess my desire for community development is vying strongly with financial logic. But this kind of input is super valuable, thank you!
The concept is called Risk Premium. It is the idea that (altruism aside), an investor will expect higher returns in exchange for riskier investments. That is why CD yield is lower than average stock market yield, for example.

Emg03063

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Re: Would you invest in a local small business by lending to the owners?
« Reply #8 on: August 08, 2015, 07:22:42 AM »
Agreed.  I made a small business loan to my then employer.  40% gross margins, 300% annual growth, needed working capital.  All made sense.  The catch?  Massive superior debt at exorbitant rates of which I was unaware at the time I made the loan was eating all of his profits. It's in default now.

thedayisbrave

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Re: Invest in local small business...feasible?
« Reply #9 on: August 08, 2015, 07:54:13 AM »
First rule.. don't risk money you can't afford to lose. 

Does the city or downtown have some sort of revitalization plan? What kind of support is there for small businesses? Not only in the form of incentives but also economic development... are there stats on whether the vibrancy of the downtown area is growing, or is it just a pipe dream?

Take a close look at the small business' financials, their team, what they are trying to do.. has it been done before? Is it new and exciting or are they just trying to do the same thing everyone else has already done? FWIW, 'new and exciting' doesn't have to mean a completely new business concept.. it can be a re-work of an existing one, for example a business concept that has been a proven success in a different city with a similar demographic as your city/town, etc.  They don't have to be reinventing the wheel.

Are there other businesses downtown that have tried to do the same? Look at competitors... how easy is it for them to get in the market? Would they face any difficulties?

What successful angel investors have told me (family members, mentors) is that the best way to ensure you get your money back is be involved in the day-to-day of the business.  Don't lend them the money and sit back and watch and hope it comes back.  Work shoulder to shoulder with them and know everything that goes on.  Of course these are people that are investing much, much more than $5K in these businesses, but the principles are the same.

Hope this helps!

Lordy

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Re: Would you invest in a local small business by lending to the owners?
« Reply #10 on: August 08, 2015, 08:21:09 AM »
I believe the Mustachian answer would be: "own equity, not debt".

If you believe in the concept enough see if you can get equity. There is lots of diversified debt out there if you are looking for that.