Beginning
Local small businesses help create the color, culture, and uniqueness in our communities. Through the “local multiplier effect,” money spent with local businesses has a higher probability of being re-spent locally, circulating throughout our community and increasing prosperity for all.
Yet local small businesses face challenges accessing start-up or growth capital. In the past, securities laws were difficult and expensive to navigate, often limiting options to high-interest credit cards and hard-to-get bank loans. Recent changes have opened new opportunities for local investment from anyone, regardless of wealth status.
Defining Local and Community
We refer to local investing as supporting your local economy, but only you can define what "local" means. Depending on your values, "local" might include your downtown Main Street or a region you're connected to but have moved away from. Similarly, only you can define "community"—whether it's those in your town or people worldwide working on topics you're passionate about.
What is Local Investing?
Local investing means putting money to work for the mutual benefit of the investor, local ventures, and the community. These benefits can be financial, in-kind (products & services), cultural, and more, such as:
- Bringing essential and/or desired products and services to their communities
- Putting their money to work close to home, rather than in global markets and corporate banks
- Growing their local economies, enhancing the local quality of life
- Creating new relationships with local business people, building community
Today’s conventional and globalized investing involves shares and debt of multinational corporations via electronic trading platforms, with networks of funds and brokers disconnecting investors from knowing what their money does.
Local investing is slow and engaging. Investors must have passion, time, and energy to find and evaluate opportunities and get to know the people offering them. In return, they can make money while creating impact—helping start businesses, create jobs, and increase community prosperity while building lasting relationships.
Why Invest Locally?
Investing locally is the most tangible way to see your community thrive, aligning your money’s value with your personal values.
A Story: Two Ways of Investing
Consider a local entrepreneur getting a bank loan. The bank invests in conventional markets far from the entrepreneur’s community. This distant money helps the entrepreneur start, but circulates back out of their community when they repay the loan.
Now consider a local entrepreneur getting local investments. Community members have a vested interest in their community’s development and see social capital returns by investing locally. The entrepreneur can offer lower financial returns than banks require. To build support, they engage with their community, hiring local carpenters, workers, and service providers. As they succeed, they repay local investors, stimulate the downtown economy, and encourage more local investing.
Types of Offerings
There are several options for putting local investing into practice, but we describe the main three here. All of these are available to ventures in every state in the country.
Investment Crowdfunding
Investment Crowdfunding is an exemption from registration for an offering that is conducted through a crowdfunding intermediary. Some states have similar crowdfunding laws that don't require an intermediary.
Direct Public Offerings (DPOs)
A public offering, directly to investors without the use of an intermediary. They are usually registered with state regulators, but sometimes they utilize an exemption from registration. How to find them: By their nature, DPOs can be advertised, so if there's one in your community, you should be able to see it—watch for them being announced or advertised!
Private Offerings
An offering made in a one-on-one conversation that doesn't involve any advertising or general solicitation. Usually, these are limited to accredited investors. How to find them: Because of strict rules that prohibit publicity, you need to have a preexisting relationship with the entrepreneur before investing. Networking with local entrepreneurs and investors will help you get connected.
First Steps
Before engaging in local investing, assess your personal finances and values to determine how much you can invest locally.
Personal Financial Assessment & Values
Do you have money to invest that you can afford to lose? Have you paid off any high-interest credit card debt? Are your non-invested savings sufficient to cover emergencies, and are they working for you at a locally-focused bank or credit union? If you answered no to any of these questions, you may want to do the work to be able to answer yes before proceeding with local investing.
If you confidently answered yes to all of these questions, define your values statement or theory of change to focus your impact. Do you want to support specific entrepreneurs (women, communities of color, veterans, the LGBTQ+ community, etc.)? Small farms? Main Street rejuvenation? Affordable housing? Clarifying desired impacts will guide your search and help identify opportunities to work with like-minded investors.
Defining How Much
Using your values statement, assess your financial situation: your age, risk comfort, cost of living, needed investment income, and emergency cash requirements. Create investing rules for criteria that will guide investments fitting your financial goals. Consider writing down your rules for some or all of the following criteria, as you see fit:
Diversification
Diversification follows the saying: “Don’t put all your eggs in one basket!” Select a wide variety of investments to minimize harm from any single bad investment. Diversify across:
- Asset classes (stocks, bonds/loans, real estate)
- Industries (retail, manufacturing, food, technology)
- Geography (local, domestic, international)
- Individual investments
Most importantly, specify in advance the maximum amount you’ll put into any one investment.
Your diversification rule might be: “My asset allocation should be 40% stocks, 40% bonds, and 20% real estate (±10% each). I can invest up to 20% in any one industry. I will invest 20% locally, 50% domestically, and 30% internationally (±10%). I will invest no more than 5% of my money in any single deal.” Once you’ve decided on this investing rule, you’ll know how much money you can sensibly put into local investments.
Risk Tolerance
This refers to your ability to remain comfortable when facing actual or potential losses. It’s closely related to diversification, which lowers risk and makes riskier investments acceptable as smaller portions of your portfolio. Conservative investors might put less than 1% in very risky investments; risk-tolerant investors can put in more. Investors with greater assets can generally afford more risk.
Know the differences between riskier investments (stocks, private company ownership) and conservative investments (bonds, loans). Distinguish between safe and risky loans based on the borrower’s ability to repay. Derivative securities like SAFEs or Options are especially risky. For example, U.S. Treasury bonds are considered safe because the government has never failed to pay back bondholders, whereas lending to a local startup without collateral is risky. Due diligence reveals investment risks, helping you decide if you’re willing to take those risks.
Your diversification rule should align with your risk tolerance. If you’re less risk-tolerant, require more bonds/loans, fewer stocks/equities, and lower maximum amounts per investment.
Liquidity
Liquidity is how quickly and easily you can access cash by selling investments or borrowing. You need cash for expected and emergency expenses, so it’s important to have sufficient liquidity for current and future needs.
Local investments tend to be illiquid; local businesses typically cannot repay loans early since they use your money for equipment, refinancing, hiring, etc., and must generate cash flow to repay over time. You’ll need other liquidity sources: bank accounts, money market funds, publicly traded stocks, and mutual funds. Diversify your liquidity sources so trouble in one area won’t make raising cash difficult.
Your liquidity rule might be: “I will keep six months’ expenses in cash at my local bank, and at least 30% of my portfolio will be in stocks or mutual funds I can sell anytime.”
Time Horizon
This refers to how long you expect to own an investment before it’s sold or paid back. Choose investments with time horizons matching your future liquidity and income needs. Liquid investments have flexible time horizons—you can sell publicly traded stocks a day or 20 years later. Illiquid local investments are less flexible but may be longer or shorter than initially expected.
Understand each investment’s time horizon, how it can vary unexpectedly, and how all your investments’ time horizons work together to meet financial needs.
Your time horizon investing rule could be: “I’ll invest up to X% in long-term investments, including equities with an uncertain time horizon, and up to Y% in the 5–10 year range, and the rest in the 2–3 year range.” For example, a two-year loan to a local business has an expected two-year horizon, but could be shorter if paid early or longer if the business has trouble repaying on time.
Returns
Returns are what you expect to earn on investments. “Gross returns” are earnings beyond your initial investment. “Net returns” are what you keep after fees and taxes. If you require certain returns to meet future goals, ensure your portfolio generates those net returns while staying diversified, liquid enough, and within your risk tolerance.
Expected returns are usually probabilities, not certainties. A local loan offering 8% interest might have lower expected returns when accounting for business failure risk.
Your returns rule might be: “I need 4% annual returns on local investments after accounting for potential losses, taxes, and fees.”
Taxes
Taxes are assessed annually on interest, dividends, and realized gains from “taxable” investments held in your name. IRA investments aren’t taxed yearly—Traditional IRAs are taxed on withdrawals, Roth IRAs are never taxed on gains/withdrawals, but you pay tax on contributions. Generally, you cannot withdraw from IRAs before age 59½ without significant penalties.
You can use IRAs for local investing through Self-Directed IRAs (SDIRAs), which allow promissory notes, private business ownership, and other non-publicly traded investments. SDIRAs are more expensive and require more paperwork, but SDIRA fees can offset returns on smaller investments.
Watch for tax pass-through entities like partnerships and LLCs—you could owe taxes on profits without receiving distributions to pay them (called “phantom income”).
Understand how investments will be taxed and ensure your tax strategy fits your net return goals.
Impact
Many people invest in alignment with personal values—religious, social, or environmental—avoiding companies incompatible with their beliefs. This was called Socially Responsible Investing (SRI), now termed Sustainable, Responsible, and Impact investing.
Impact investing aims for positive, measurable effects like job creation or community development. Most local investments are considered impact investments—they enable businesses to hire people, open stores, purchase local goods/services, and create tangible community change. Publicly traded stocks rarely have a measurable real-world impact unless you use shareholder advocacy effectively.
Consider if specific values and/or impact are important to you, and create a “values & impact” rule to guide investment selection.
An example could be “I will invest in impact investments as much as possible, especially focusing on renewable energy and sustainable agriculture, and I will avoid investments in industries that cause pollution.”
Locality
Locality is where an investment’s impact is most felt. Define what “local” means to you—start with a geographic area that feels local. Consider what parts of a business (ownership, staff, office location) need to be in your area for you to consider it local.
For example, is an investment “local” if employees and location are nearby but owned by someone outside the area? 100% local small businesses are straightforward. Chain stores, franchises, and non-locally owned businesses are less clear. Your answers help construct a locality investing rule.
Governance
Governance is how organizational decisions are made. Some investments include voting power, others don’t. If you’re lending, you likely won’t have a voice in the organization’s governance. If you’re investing in equity, you may or may not. You will want to be aware of whether the investment includes voting rights or other opportunities to provide input.
Governance
Leverage is how much you are borrowing relative to how much you own. It’s common to have a leveraged home in the form of a mortgage. Some people borrow money on margin in their brokerage accounts and use it to buy stocks, which is much riskier than buying stocks with cash. The more debt you take on, the higher the risk that you could experience a cash flow crunch that prevents you from being able to make your interest payments, which could lead to forced sales of your assets or even bankruptcy.
Stay aware of how much you are borrowing and keep it within your risk tolerance. It’s not recommended to borrow money to invest it locally.
Disclaimer: The National Coalition for Community Capital (NC3) is not a registered investment, legal, or tax advisor or broker/dealer. All ideas and opinions expressed by NC3 on this website are intended for educational purposes only and should not be construed as investment or legal advice.
Next - Engaging
Feeling confident? Consider engaging in local investing.
Local investors must have the passion, time, and energy to find and evaluate local investment opportunities.