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Guide to Investing in Local Businesses

Investing in Local Small Businesses
Susan Guillory
Susan GuilloryUpdated October 21, 2022
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Small businesses are often considered the backbone of a community. So perhaps it’s not surprising that they often rely on local investors to get the capital they need to grow and expand. Local business investment can be a win for both sides of the deal: Business owners get the funding they need, while investors can use a small business investment as a way to diversify their portfolios. Read on for a closer look at local business investing, including who can do it, how to woo a local investor, plus the pros and cons of this type of business financing.Recommended: 25 Low-Investment Business Ideas 

Can Anybody Invest in a Small Business?

Generally, yes. A local investor could be a professional investor, such as a venture capitalist or angel investor, or it might simply be a fellow business owner, other member of the community, a friend, or even a family member of the business owner. Though you don’t need any special qualifications to invest in a small business, it helps if an investor has experience and/or contacts that could help the business grow on top of the capital the business is seeking. It can also help if an investor shares a business owner’s interests and future goals. 

Pros and Cons of Investing in Local Businesses

Local business investment comes with advantages and disadvantages — for both the business and the investor. Here are some you may want to consider.

Pros

An investor who provides an infusion of cash will either own a percentage of equity in the company or will receive the money back with interest. Either way, they have the potential to get a great return on their investment if the company does well. In a volatile economy, this might provide more reliable income than other investment tools.As a business owner, a local investor can provide you with the capital you need to take your business to the next level. If you bring on an investor in exchange for equity, you may also benefit from their connections and experience. It can also be helpful to bounce ideas off of someone else to ensure you’re doing the right thing for your business.

Cons

Of course, investing in a small local business carries risks for the investor. Revenue and returns are never guaranteed, and new small businesses can, and often do, go belly up. If that happens, an investor could potentially lose all of the capital they put into the business.There are also drawbacks for business owners. If you trade equity for the investment, you will likely need to give up some control over your company and share  decision-making with the investor. This could be problematic if you don't always see eye to eye. Plus, you’ll be required to share your profits. 

Investing in Local Businesses

There are two ways a person or firm can invest in a local small business: They can provide funds in exchange for equity or lend money to the business in exchange for interest.

Equity Investments

An equity investment involves buying an ownership stake in the company. The investor provides a certain amount of capital for a certain percentage of the profits (or losses) and, possibly, control over the business. In some cases, the percentage of the business the investor receives is proportional to the total capital they provide.Generally, the business can use the invested capital for any expenses needed for expansion, such as hiring new employees, running operations, or paying off any debt they may have. 

Debt Investments

A debt investment involves loaning money to a small business in exchange for interest. This type of investment may look like a small business loan offered by a bank, but instead is offered by an investment company or individual. The business is typically given a lump sum of money upfront, then needs to pay it back (plus interest) in regular installments over a specific period of time (the loan’s term). With this kind of investment, the repayment obligation is not tied to a business’s revenue.

Finding Investors for Your Local Business

So where can you find people or firms interested in investing in local businesses? Below are some resources to consider.

1. Venture Capital and Angel Investors

Angel investors are high-net-worth individuals who can provide the funding, resources, and background to make a company successful. They invest their own capital typically in return for an ownership stake in the business, and tend to focus on startups and early-stage businesses.Venture capitalists, by contrast, do not invest their own money but that of investors. They tend to provide larger amounts than angel investors and to get involved in businesses that are already established and have a proven track record. 

2. Friends and Family Investment

Potential investors might be closer than you think. Friends and family can be a good source of capital, since these are the people that know you best. To keep things fully professional (and prevent straining relationships), it’s a good idea to put the terms of the deal in writing. If the money is a loan, you’ll want to set out the terms in a promissory note. If it’s an investment, it’s wise to lay out what is expected in terms of reaping profits, and also make it clear the investor may not recoup any of the money if the business doesn’t succeed.

3. Crowdfunding

There are hundreds of crowdfunding sites where anyone (not just professional investors) can contribute toward a new business project, product, or service. While it can take time and effort to create a compelling campaign, businesses typically don’t have to give up equity with crowdfunding for businesses. Instead, a business may need to provide a token of appreciation to donors or investors, like early access to your product or a t-shirt with your company’s logo on it.

Alternative Ways to Get Funding for Your Business

Finding local investors for your business isn’t the only way to get the capital you need for expansion. Here are some other financing options you may want to consider.

Small Business Loans

Banks, credit unions, and online lenders offer many different types of business loans. If you have good credit, you may qualify for a bank loan with low-interest rates with favorable termsEven if you have fair or poor credit, however, you may be able to get a business loan from an online lender. These alternative lenders often have more flexible qualification criteria than banks, and also provide faster funding. However, loan amounts may be smaller and interest rates can be higher.

Small Business Grants

There are a variety of government, nonprofit, and private entities that offer small business grants, which do not need to be paid back. You may be able to qualify for a grant if your small business supports a specific government initiative, your ownership meets certain qualifications (such as women, veterans, or minorities), or you operate in an underserved community. 

Business Line of Credit

A business line of credit is a flexible, short-term type of financing. Similar to a credit card, it allows you to withdraw funds as needed up to a predetermined amount and only pay interest on the money you withdraw. Once you repay the funds you’ve borrowed, you can continue to draw on the line. 

The Takeaway 

Local investors can be a great fit for a small business looking for an injection of capital. While these investors are generally looking to make a profit, they often have a personal interest in the local community, along with a desire to support the local economy.As with other types of investors, bringing in a local investor will often involve giving up a stake in your business, meaning you will need to give up a certain amount of control over your company, as well as some of its future profits. If you’re interested in exploring your other types of small business funding, Lantern by SoFi can help. With our online loan comparison tool, you can access offers from multiple small business lenders matched to your needs and qualifications with one short application.
Photo credit: iStock/marchmeena29

Frequently Asked Questions

What do investors look for when investing in local businesses?
Do some investors prefer to support local businesses?
What are some tips for attracting local investors to your business?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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